Committee Report

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113th Congress Rept. 113-381
HOUSE OF REPRESENTATIVES
2d Session Part 1
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BUDGET AND ACCOUNTING TRANSPARENCY ACT OF 2014
_______
March 18, 2014.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Ryan of Wisconsin, from the Committee on the Budget, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 1872]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Budget, to whom was referred the bill
(H.R. 1872) to amend the Balanced Budget and Emergency Deficit
Control Act of 1985 to increase transparency in Federal
budgeting, and for other purposes, having considered the same,
reports favorably thereon with an amendment and recommends that
the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Budget and Accounting Transparency Act
of 2014''.
TITLE I--FAIR VALUE ESTIMATES
SEC. 101. CREDIT REFORM.
(a) In General.--Title V of the Congressional Budget Act of 1974 is
amended to read as follows:
``TITLE V--FAIR VALUE
``SEC. 500. SHORT TITLE.
``This title may be cited as the `Fair Value Accounting Act of 2014'.
``SEC. 501. PURPOSES.
``The purposes of this title are to--
``(1) measure more accurately the costs of Federal credit
programs by accounting for them on a fair value basis;
``(2) place the cost of credit programs on a budgetary basis
equivalent to other Federal spending;
``(3) encourage the delivery of benefits in the form most
appropriate to the needs of beneficiaries; and
``(4) improve the allocation of resources among Federal
programs.
``SEC. 502. DEFINITIONS.
``For purposes of this title:
``(1) The term `direct loan' means a disbursement of funds by
the Government to a non-Federal borrower under a contract that
requires the repayment of such funds with or without interest.
The term includes the purchase of, or participation in, a loan
made by another lender and financing arrangements that defer
payment for more than 90 days, including the sale of a
Government asset on credit terms. The term does not include the
acquisition of a federally guaranteed loan in satisfaction of
default claims or the price support loans of the Commodity
Credit Corporation.
``(2) The term `direct loan obligation' means a binding
agreement by a Federal agency to make a direct loan when
specified conditions are fulfilled by the borrower.
``(3) The term `loan guarantee' means any guarantee,
insurance, or other pledge with respect to the payment of all
or a part of the principal or interest on any debt obligation
of a non-Federal borrower to a non-Federal lender, but does not
include the insurance of deposits, shares, or other
withdrawable accounts in financial institutions.
``(4) The term `loan guarantee commitment' means a binding
agreement by a Federal agency to make a loan guarantee when
specified conditions are fulfilled by the borrower, the lender,
or any other party to the guarantee agreement.
``(5)(A) The term `cost' means the sum of the Treasury
discounting component and the risk component of a direct loan
or loan guarantee, or a modification thereof.
``(B) The Treasury discounting component shall be the
estimated long-term cost to the Government of a direct loan or
loan guarantee, or modification thereof, calculated on a net
present value basis, excluding administrative costs and any
incidental effects on governmental receipts or outlays.
``(C) The risk component shall be an amount equal to the
difference between--
``(i) the estimated long-term cost to the Government
of a direct loan or loan guarantee, or modification
thereof, estimated on a fair value basis, applying the
guidelines set forth by the Financial Accounting
Standards Board in Financial Accounting Standards #157,
or a successor thereto, excluding administrative costs
and any incidental effects on governmental receipts or
outlays; and
``(ii) the Treasury discounting component of such
direct loan or loan guarantee, or modification thereof.
``(D) The Treasury discounting component of a direct loan
shall be the net present value, at the time when the direct
loan is disbursed, of the following estimated cash flows:
``(i) Loan disbursements.
``(ii) Repayments of principal.
``(iii) Essential preservation expenses, payments of
interest and other payments by or to the Government
over the life of the loan after adjusting for estimated
defaults, prepayments, fees, penalties, and other
recoveries, including the effects of changes in loan
terms resulting from the exercise by the borrower of an
option included in the loan contract.
``(E) The Treasury discounting component of a loan guarantee
shall be the net present value, at the time when the guaranteed
loan is disbursed, of the following estimated cash flows:
``(i) Payments by the Government to cover defaults
and delinquencies, interest subsidies, essential
preservation expenses, or other payments.
``(ii) Payments to the Government including
origination and other fees, penalties, and recoveries,
including the effects of changes in loan terms
resulting from the exercise by the guaranteed lender of
an option included in the loan guarantee contract, or
by the borrower of an option included in the guaranteed
loan contract.
``(F) The cost of a modification is the sum of--
``(i) the difference between the current estimate of
the Treasury discounting component of the remaining
cash flows under the terms of a direct loan or loan
guarantee and the current estimate of the Treasury
discounting component of the remaining cash flows under
the terms of the contract, as modified; and
``(ii) the difference between the current estimate of
the risk component of the remaining cash flows under
the terms of a direct loan or loan guarantee and the
current estimate of the risk component of the remaining
cash flows under the terms of the contract as modified.
``(G) In estimating Treasury discounting components, the
discount rate shall be the average interest rate on marketable
Treasury securities of similar duration to the cash flows of
the direct loan or loan guarantee for which the estimate is
being made.
``(H) When funds are obligated for a direct loan or loan
guarantee, the estimated cost shall be based on the current
assumptions, adjusted to incorporate the terms of the loan
contract, for the fiscal year in which the funds are obligated.
``(6) The term `program account' means the budget account
into which an appropriation to cover the cost of a direct loan
or loan guarantee program is made and from which such cost is
disbursed to the financing account.
``(7) The term `financing account' means the nonbudget
account or accounts associated with each program account which
holds balances, receives the cost payment from the program
account, and also includes all other cash flows to and from the
Government resulting from direct loan obligations or loan
guarantee commitments made on or after October 1, 1991.
``(8) The term `liquidating account' means the budget account
that includes all cash flows to and from the Government
resulting from direct loan obligations or loan guarantee
commitments made prior to October 1, 1991. These accounts shall
be shown in the budget on a cash basis.
``(9) The term `modification' means any Government action
that alters the estimated cost of an outstanding direct loan
(or direct loan obligation) or an outstanding loan guarantee
(or loan guarantee commitment) from the current estimate of
cash flows. This includes the sale of loan assets, with or
without recourse, and the purchase of guaranteed loans (or
direct loan obligations) or loan guarantees (or loan guarantee
commitments) such as a change in collection procedures.
``(10) The term `current' has the same meaning as in section
250(c)(9) of the Balanced Budget and Emergency Deficit Control
Act of 1985.
``(11) The term `Director' means the Director of the Office
of Management and Budget.
``(12) The term `administrative costs' means costs related to
program management activities, but does not include essential
preservation expenses.
``(13) The term `essential preservation expenses' means
servicing and other costs that are essential to preserve the
value of loan assets or collateral.
``SEC. 503. OMB AND CBO ANALYSIS, COORDINATION, AND REVIEW.
``(a) In General.--For the executive branch, the Director shall be
responsible for coordinating the estimates required by this title. The
Director shall consult with the agencies that administer direct loan or
loan guarantee programs.
``(b) Delegation.--The Director may delegate to agencies authority to
make estimates of costs. The delegation of authority shall be based
upon written guidelines, regulations, or criteria consistent with the
definitions in this title.
``(c) Coordination With the Congressional Budget Office.--In
developing estimation guidelines, regulations, or criteria to be used
by Federal agencies, the Director shall consult with the Director of
the Congressional Budget Office.
``(d) Improving Cost Estimates.--The Director and the Director of the
Congressional Budget Office shall coordinate the development of more
accurate data on historical performance and prospective risk of direct
loan and loan guarantee programs. They shall annually review the
performance of outstanding direct loans and loan guarantees to improve
estimates of costs. The Office of Management and Budget and the
Congressional Budget Office shall have access to all agency data that
may facilitate the development and improvement of estimates of costs.
``(e) Historical Credit Programs Costs.--The Director shall review,
to the extent possible, historical data and develop the best possible
estimates of adjustments that would convert aggregate historical budget
data to credit reform accounting.
``SEC. 504. BUDGETARY TREATMENT.
``(a) President's Budget.--Beginning with fiscal year 2017, the
President's budget shall reflect the costs of direct loan and loan
guarantee programs. The budget shall also include the planned level of
new direct loan obligations or loan guarantee commitments associated
with each appropriations request. For each fiscal year within the five-
fiscal year period beginning with fiscal year 2017, such budget shall
include, on an agency-by-agency basis, subsidy estimates and costs of
direct loan and loan guarantee programs with and without the risk
component.
``(b) Appropriations Required.--Notwithstanding any other provision
of law, new direct loan obligations may be incurred and new loan
guarantee commitments may be made for fiscal year 2017 and thereafter
only to the extent that--
``(1) new budget authority to cover their costs is provided
in advance in an appropriation Act;
``(2) a limitation on the use of funds otherwise available
for the cost of a direct loan or loan guarantee program has
been provided in advance in an appropriation Act; or
``(3) authority is otherwise provided in appropriation Acts.
``(c) Exemption for Direct Spending Programs.--Subsections (b) and
(e) shall not apply to--
``(1) any direct loan or loan guarantee program that
constitutes an entitlement (such as the guaranteed student loan
program or the veteran's home loan guaranty program);
``(2) the credit programs of the Commodity Credit Corporation
existing on the date of enactment of this title; or
``(3) any direct loan (or direct loan obligation) or loan
guarantee (or loan guarantee commitment) made by the Federal
National Mortgage Association or the Federal Home Loan Mortgage
Corporation.
``(d) Budget Accounting.--
``(1) The authority to incur new direct loan obligations,
make new loan guarantee commitments, or modify outstanding
direct loans (or direct loan obligations) or loan guarantees
(or loan guarantee commitments) shall constitute new budget
authority in an amount equal to the cost of the direct loan or
loan guarantee in the fiscal year in which definite authority
becomes available or indefinite authority is used. Such budget
authority shall constitute an obligation of the program account
to pay to the financing account.
``(2) The outlays resulting from new budget authority for the
cost of direct loans or loan guarantees described in paragraph
(1) shall be paid from the program account into the financing
account and recorded in the fiscal year in which the direct
loan or the guaranteed loan is disbursed or its costs altered.
``(3) All collections and payments of the financing accounts
shall be a means of financing.
``(e) Modifications.--An outstanding direct loan (or direct loan
obligation) or loan guarantee (or loan guarantee commitment) shall not
be modified in a manner that increases its costs unless budget
authority for the additional cost has been provided in advance in an
appropriation Act.
``(f) Reestimates.--When the estimated cost for a group of direct
loans or loan guarantees for a given program made in a single fiscal
year is re-estimated in a subsequent year, the difference between the
reestimated cost and the previous cost estimate shall be displayed as a
distinct and separately identified subaccount in the program account as
a change in program costs and a change in net interest. There is hereby
provided permanent indefinite authority for these re-estimates.
``(g) Administrative Expenses.--All funding for an agency's
administrative costs associated with a direct loan or loan guarantee
program shall be displayed as distinct and separately identified
subaccounts within the same budget account as the program's cost.
``SEC. 505. AUTHORIZATIONS.
``(a) Authorization for Financing Accounts.--In order to implement
the accounting required by this title, the President is authorized to
establish such non-budgetary accounts as may be appropriate.
``(b) Treasury Transactions With the Financing Accounts.--
``(1) In general.--The Secretary of the Treasury shall borrow
from, receive from, lend to, or pay to the financing accounts
such amounts as may be appropriate. The Secretary of the
Treasury may prescribe forms and denominations, maturities, and
terms and conditions for the transactions described in the
preceding sentence, except that the rate of interest charged by
the Secretary on lending to financing accounts (including
amounts treated as lending to financing accounts by the Federal
Financing Bank (hereinafter in this subsection referred to as
the `Bank') pursuant to section 405(b)) and the rate of
interest paid to financing accounts on uninvested balances in
financing accounts shall be the same as the rate determined
pursuant to section 502(5)(G).
``(2) Loans.--For guaranteed loans financed by the Bank and
treated as direct loans by a Federal agency pursuant to section
406(b)(1), any fee or interest surcharge (the amount by which
the interest rate charged exceeds the rate determined pursuant
to section 502(5)(G) that the Bank charges to a private
borrower pursuant to section 6(c) of the Federal Financing Bank
Act of 1973 shall be considered a cash flow to the Government
for the purposes of determining the cost of the direct loan
pursuant to section 502(5). All such amounts shall be credited
to the appropriate financing account.
``(3) Reimbursement.--The Bank is authorized to require
reimbursement from a Federal agency to cover the administrative
expenses of the Bank that are attributable to the direct loans
financed for that agency. All such payments by an agency shall
be considered administrative expenses subject to section
504(g). This subsection shall apply to transactions related to
direct loan obligations or loan guarantee commitments made on
or after October 1, 1991.
``(4) Authority.--The authorities provided in this subsection
shall not be construed to supersede or override the authority
of the head of a Federal agency to administer and operate a
direct loan or loan guarantee program.
``(5) Title 31.--All of the transactions provided in the
subsection shall be subject to the provisions of subchapter II
of chapter 15 of title 31, United States Code.
``(6) Treatment of cash balances.--Cash balances of the
financing accounts in excess of current requirements shall be
maintained in a form of uninvested funds and the Secretary of
the Treasury shall pay interest on these funds. The Secretary
of the Treasury shall charge (or pay if the amount is negative)
financing accounts an amount equal to the risk component for a
direct loan or loan guarantee, or modification thereof. Such
amount received by the Secretary of the Treasury shall be a
means of financing and shall not be considered a cash flow of
the Government for the purposes of section 502(5).
``(c) Authorization for Liquidating Accounts.--(1) Amounts in
liquidating accounts shall be available only for payments resulting
from direct loan obligations or loan guarantee commitments made prior
to October 1, 1991, for--
``(A) interest payments and principal repayments to the
Treasury or the Federal Financing Bank for amounts borrowed;
``(B) disbursements of loans;
``(C) default and other guarantee claim payments;
``(D) interest supplement payments;
``(E) payments for the costs of foreclosing, managing, and
selling collateral that are capitalized or routinely deducted
from the proceeds of sales;
``(F) payments to financing accounts when required for
modifications;
``(G) administrative costs and essential preservation
expenses, if--
``(i) amounts credited to the liquidating account
would have been available for administrative costs and
essential preservation expenses under a provision of
law in effect prior to October 1, 1991; and
``(ii) no direct loan obligation or loan guarantee
commitment has been made, or any modification of a
direct loan or loan guarantee has been made, since
September 30, 1991; or
``(H) such other payments as are necessary for the
liquidation of such direct loan obligations and loan guarantee
commitments.
``(2) Amounts credited to liquidating accounts in any year shall be
available only for payments required in that year. Any unobligated
balances in liquidating accounts at the end of a fiscal year shall be
transferred to miscellaneous receipts as soon as practicable after the
end of the fiscal year.
``(3) If funds in liquidating accounts are insufficient to satisfy
obligations and commitments of such accounts, there is hereby provided
permanent, indefinite authority to make any payments required to be
made on such obligations and commitments.
``(d) Reinsurance.--Nothing in this title shall be construed as
authorizing or requiring the purchase of insurance or reinsurance on a
direct loan or loan guarantee from private insurers. If any such
reinsurance for a direct loan or loan guarantee is authorized, the cost
of such insurance and any recoveries to the Government shall be
included in the calculation of the cost.
``(e) Eligibility and Assistance.--Nothing in this title shall be
construed to change the authority or the responsibility of a Federal
agency to determine the terms and conditions of eligibility for, or the
amount of assistance provided by a direct loan or a loan guarantee.
``SEC. 506. TREATMENT OF DEPOSIT INSURANCE AND AGENCIES AND OTHER
INSURANCE PROGRAMS.
``This title shall not apply to the credit or insurance activities of
the Federal Deposit Insurance Corporation, National Credit Union
Administration, Resolution Trust Corporation, Pension Benefit Guaranty
Corporation, National Flood Insurance, National Insurance Development
Fund, Crop Insurance, or Tennessee Valley Authority.
``SEC. 507. EFFECT ON OTHER LAWS.
``(a) Effect on Other Laws.--This title shall supersede, modify, or
repeal any provision of law enacted prior to the date of enactment of
this title to the extent such provision is inconsistent with this
title. Nothing in this title shall be construed to establish a credit
limitation on any Federal loan or loan guarantee program.
``(b) Crediting of Collections.--Collections resulting from direct
loans obligated or loan guarantees committed prior to October 1, 1991,
shall be credited to the liquidating accounts of Federal agencies.
Amounts so credited shall be available, to the same extent that they
were available prior to the date of enactment of this title, to
liquidate obligations arising from such direct loans obligated or loan
guarantees committed prior to October 1, 1991, including repayment of
any obligations held by the Secretary of the Treasury or the Federal
Financing Bank. The unobligated balances of such accounts that are in
excess of current needs shall be transferred to the general fund of the
Treasury. Such transfers shall be made from time to time but, at least
once each year.''.
(b) Conforming Amendment.--The table of contents set forth in section
1(b) of the Congressional Budget and Impoundment Control Act of 1974 is
amended by striking the items relating to title V and inserting the
following:
``TITLE V--FAIR VALUE
``Sec. 500. Short title.
``Sec. 501. Purposes.
``Sec. 502. Definitions.
``Sec. 503. OMB and CBO analysis, coordination, and review.
``Sec. 504. Budgetary treatment.
``Sec. 505. Authorizations.
``Sec. 506. Treatment of deposit insurance and agencies and other
insurance programs.
``Sec. 507. Effect on other laws.''.
SEC. 102. BUDGETARY ADJUSTMENT.
(a) In General.--Section 251(b)(1) of the Balanced Budget and
Emergency Deficit Control Act of 1985 is amended by adding at the end
the following new sentence: ``A change in discretionary spending solely
as a result of the amendment to title V of the Congressional Budget Act
of 1974 made by the Budget and Accounting Transparency Act of 2014
shall be treated as a change of concept under this paragraph.''.
(b) Report.--Before adjusting the discretionary caps pursuant to the
authority provided in subsection (a), the Office of Management and
Budget shall report to the Committees on the Budget of the House of
Representatives and the Senate on the amount of that adjustment, the
methodology used in determining the size of that adjustment, and a
program-by-program itemization of the components of that adjustment.
(c) Schedule.--The Office of Management and Budget shall not make an
adjustment pursuant to the authority provided in subsection (a) sooner
than 60 days after providing the report required in subsection (b).
SEC. 103. EFFECTIVE DATE.
The amendments made by section 101 shall take effect beginning with
fiscal year 2017.
TITLE II--BUDGETARY TREATMENT
SEC. 201. CBO AND OMB STUDIES RESPECTING BUDGETING FOR COSTS OF FEDERAL
INSURANCE PROGRAMS.
Not later than 1 year after the date of enactment of this Act, the
Directors of the Congressional Budget Office and of the Office of
Management and Budget shall each prepare a study and make
recommendations to the Committees on the Budget of the House of
Representatives and the Senate as to the feasability of applying fair
value concepts to budgeting for the costs of Federal insurance
programs.
SEC. 202. ON-BUDGET STATUS OF FANNIE MAE AND FREDDIE MAC.
Notwithstanding any other provision of law, the receipts and
disbursements, including the administrative expenses, of the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation shall be counted as new budget authority, outlays,
receipts, or deficit or surplus for purposes of--
(1) the budget of the United States Government as submitted
by the President;
(2) the congressional budget; and
(3) the Balanced Budget and Emergency Deficit Control Act of
1985.
SEC. 203. EFFECTIVE DATE.
Section 202 shall not apply with respect to an enterprise (as such
term is defined in section 1303 of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502)) after the
date that all of the following have occurred:
(1) The conservatorship for such enterprise under section
1367 of such Act (12 U.S.C. 4617) has been terminated.
(2) The Director of the Federal Housing Finance Agency has
certified in writing that such enterprise has repaid to the
Federal Government the maximum amount consistent with
minimizing total cost to the Federal Government of the
financial assistance provided to the enterprise by the Federal
Government pursuant to the amendments made by section 1117 of
the Housing and Economic Recovery Act of 2008 (Public Law 110-
289; 122 Stat. 2683) or otherwise.
(3) The charter for the enterprise has been revoked,
annulled, or terminated and the authorizing statute (as such
term is defined in such section 1303) with respect to the
enterprise has been repealed.
TITLE III--BUDGET REVIEW AND ANALYSIS
SEC. 301. CBO AND OMB REVIEW AND RECOMMENDATIONS RESPECTING RECEIPTS
AND COLLECTIONS.
Not later than 1 year after the date of enactment of this Act, the
Director of the Office of Management and Budget shall prepare a study
of the history of offsetting collections against expenditures and the
amount of receipts collected annually, the historical application of
the budgetary terms ``revenue'', ``offsetting collections'', and
``offsetting receipts'', and review the application of those terms and
make recommendations to the Committees on the Budget of the House of
Representatives and the Senate of whether such usage should be
continued or modified. The Director of the Congressional Budget Office
shall review the history and recommendations prepared by the Director
of the Office of Management and Budget and shall submit comments and
recommendations to such Committees.
SEC. 302. AGENCY BUDGET JUSTIFICATIONS.
Section 1108 of title 31, United States Code, is amended by inserting
at the end the following new subsections:
``(h)(1) Whenever any agency prepares and submits written budget
justification materials for any committee of the House of
Representatives or the Senate, such agency shall post such budget
justification on the same day of such submission on the `open' page of
the public website of the agency, and the Office of Management and
Budget shall post such budget justification in a centralized location
on its website, in the format developed under paragraph (2). Each
agency shall include with its written budget justification the process
and methodology the agency is using to comply with the Fair Value
Accounting Act of 2014.
``(2) The Office of Management and Budget, in consultation with the
Congressional Budget Office and the Government Accountability Office,
shall develop and notify each agency of the format in which to post a
budget justification under paragraph (1). Such format shall be designed
to ensure that posted budget justifications for all agencies--
``(A) are searchable, sortable, and downloadable by the
public;
``(B) are consistent with generally accepted standards and
practices for machine-discoverability;
``(C) are organized uniformly, in a logical manner that makes
clear the contents of a budget justification and relationships
between data elements within the budget justification and among
similar documents; and
``(D) use uniform identifiers, including for agencies,
bureaus, programs, and projects.
``(i)(1) Not later than the day that the Office of Management and
Budget issues guidelines, regulations, or criteria to agencies on how
to calculate the risk component under the Fair Value Accounting Act of
2014, it shall submit a written report to the Committees on the Budget
of the House of Representatives and the Senate containing all such
guidelines, regulations, or criteria.
``(2) For fiscal year 2017 and each of the next four fiscal years
thereafter, the Comptroller General shall submit an annual report to
the Committees on the Budget of the House of Representatives and the
Senate reviewing and evaluating the progress of agencies in the
implementation of the Fair Value Accounting Act of 2014.
``(3) Such guidelines, regulations, or criteria shall be deemed to be
a rule for purposes of section 553 of title 5 and shall be issued after
notice and opportunity for public comment in accordance with the
procedures under such section.''.
Introduction
Transparency and sound accounting are the bedrocks of
efficient and effective budgeting. The ``Budget and Accounting
Transparency Act of 2014'' (H.R. 1872) was introduced by
Representative Scott Garrett of New Jersey on May 8, 2013. The
bill increases the transparency of Federal budgeting by
bringing off-budget entities on-budget, reforms the accounting
methodology used for Federal credit programs to reflect best
practices from the private sector, and requires agencies to
promptly make public the budget justification materials they
submit to Congress in support of their requests for public
funds. It also commissions two studies in furtherance of the
Budget Committees' ongoing review of potential improvements to
the congressional budget process.
Summary of Proposed Changes
Fair Value Accounting
Beginning with fiscal year 2017, the bill reforms the
budgetary treatment of Federal credit programs to provide a
more accurate and comprehensive reporting of the cost these
programs pose to taxpayers.
The Federal Credit Reform Act of 1990 (FCRA) reformed the
budgetary treatment of Federal direct loans and loan guarantees
to account for the cost of these programs on an accrual basis.
Under the 1990 bill, the cost of these programs is developed by
producing a net present value of cash flows using a discount
rate based on the Federal Government's borrowing costs. Over
time, CBO has concluded that the Treasury discount rate does
not fully capture the cost of credit programs:
``Fair-value estimates differ from estimates produced using
the FCRA methodology in an important way: By incorporating a
market-based risk premium, fair value estimates recognize that
the financial risk that the government assumes when issuing
credit guarantees is more costly to taxpayers than FCRA-based
estimates suggest.''\1\
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\1\Letter from CBO Director Douglas W. Elmendorf to Paul Ryan,
Chairman of the Committee on the Budget, House of Representatives, May
18, 2011, http://www.cbo.gov/ftpdocs/120xx/doc12054/05-18-
FHA_Letter.pdf.
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In addition to CBO's conclusion that fair value accounting
provides a comprehensive measure of the Federal Government's
financial risk, other entities have recommended this reform.
For example, a panel composed of former CBO Directors, OMB
Directors, and other budget experts recommended moving to fair
value accounting after concluding:
``Two decades of experience with accrual treatment of
Federal credit has demonstrated that current valuation rules
understate the subsidies that government provides through
direct and guaranteed loans and other activities that shift
risk to taxpayers. To correct this understatement, the budget
should use fair-market values in calculating costs for
financial guarantees, insurance, direct loans, loan guarantees,
and programs that invest in risky financial assets. Fair value
accounting would make clear that the Federal Government cannot
invest in risky assets more cheaply nor earn a higher rate of
return than do private firms or individuals. Ultimately,
taxpayers bear all the costs of investing, and this fact should
be explicitly reflected in the budget. Accounting for financial
guarantees, insurance, direct loans, and loan guarantees on an
accrual basis is the first step in measuring the cost of these
activities in a timely manner. But the cost measure must also
include risk. Without that component, the budget understates
the cost of these programs.''\2\
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\2\A Peterson-Pew Commission Report on Budget Reform, ``Getting
Back in the Black,'' p. 29, Nov. 2010, http://budgetreform.org/sites/
default/files/Getting_Back_in_the_Black.pdf.
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The bill corrects this current flaw by amending FCRA to
ensure the full exposure to the taxpayer is recorded in the
budget by providing that fair value estimates be used in
calculating the cost of Federal credit programs. It also
provides for a one-time adjustment to the statutory caps on
discretionary spending contained in the Balanced Budget and
Emergency Deficit Control Act of 1985 (P.L. 99-177) to ensure
the caps are held harmless for this accounting change.
Accounting for Fannie Mae and Freddie Mac
The bill requires that the receipts and disbursements of
the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) be counted
as new budget authority, outlays, receipts, deficits or
surpluses for purposes of the President's budget request, the
congressional budget resolution, and the Balanced Budget and
Emergency Deficit Control Act of 1985.
While the Congressional Budget Office (CBO) and Congress
have already adopted this approach the Administration has not.
Section 202 rectifies this disparity by bringing Fannie Mae and
Freddie Mac (the GSEs) on-budget and consistent with CBO's
current practice.
On September 6, 2008, using the authority provided under
the Housing and Economic Recovery Act of 2008 (P.L. 110-289),
the Federal Housing Finance Agency (FHFA) placed Fannie Mae and
Freddie Mac into conservatorships. The purpose of the
conservatorships is to ``stabilize [the] troubled institutions
with the objective of maintaining normal business operations
and restoring financial safety and soundness.''\3\ At the same
time, the Department of the Treasury entered into agreements
with the GSEs known as Senior Preferred Stock Purchase
Agreements (PSPA). The PSPAs are legally binding agreements by
which the Treasury is obligated to provide sufficient capital
to keep the net worth of Fannie Mae and Freddie Mac from
falling below zero.
---------------------------------------------------------------------------
\3\Federal Housing Finance Agency--Office of Conservatorship
Operations, http://www.fhfa.gov/Default.aspx?Page=344, (accessed Jan.
20, 2012).
---------------------------------------------------------------------------
Given the conservatorship and the Treasury's commitment to
maintain a positive net value for the GSEs, their agency debt
now has a certain public character. Consistent with other
``agency debt'' it is the expectation of the Committee that OMB
will include the GSEs' agency debt in its Analytical
Perspectives volume together with other agency debt issued by
entities such as the Tennessee Valley Authority. Under the
terms of the PSPA, the GSEs are required to reduce the size of
their investment portfolios until they reach $250 billion.
Because the primary purpose of the agency debt issued by the
GSEs is to finance this portfolio, it is expected that their
debt issuances will decline with the size of the investment
portfolio. The bill does not establish a statutory cap on the
issuance of agency debt by the GSEs nor does it include such
debt issuances in the Federal debt ceiling.
Finally, section 203 allows for the removal of the GSEs
from the Federal budget if three conditions are satisfied.
These conditions are designed to ensure that a GSE is removed
from the Federal budget if it becomes a fully private entity
with no explicit or implicit guarantee from the Federal
Government.
First, the conservatorship of the entity must be
terminated.
Second, the Director of the FHFA must have certified that
the GSE has repaid as much of the funds received from the
Federal Government as is consistent with minimizing the total
losses to the Federal Government. This condition recognizes
that the Federal Government may not receive full repayment. It
should, though, ensure the Federal Government recovers the full
remaining value of these enterprises if they are privatized.
Third, the charter of the enterprise and authorizing
statute must be repealed.
Transparency in Agency Budget Requests
The bill requires Federal agencies to publish their budget
justification materials on their official websites on the same
day those materials are provided to Congress. OMB currently
requires agencies to post these materials to their websites
within two weeks of transmittal to Congress.\4\ As under
current practice, materials should not be released if the
materials are so classified in order to protect the national
security.
---------------------------------------------------------------------------
\4\OMB Circular A-11, 22.6.
---------------------------------------------------------------------------
Studies in Support of Future Reform
The legislation commissions two studies on areas of the
budget process that may warrant reform in future legislation.
These studies will support the Budget Committees in fulfillment
of their ongoing responsibility under Sec. 703 of the
Congressional Budget Act to ``study on a continuing basis
proposals designed to improve and facilitate methods of
congressional budgetmaking.''
First, the Directors of the CBO and OMB are directed in
section 201 to independently conduct studies and provide
recommendations to the Budget Committees on the feasibility of
applying fair value concepts (or some similar accrual
methodology) to budgeting for the costs of Federal insurance
programs, such as pension insurance and political risk
insurance. These programs are currently budgeted for on a cash-
flow basis, meaning that a program's cost is the net cash spent
in a fiscal year. Income is recorded in the budget when
received, and expenses are recorded when paid, regardless of
when the income is earned or the expense incurred.
The Directors of the CBO and OMB are directed to report
back to the Budget Committees within one year of enactment of
this bill on the feasibility of addressing this shortcoming in
the current budgeting methodology for Federal insurance
programs through a move to a fair value-based accrual budgeting
system.
Second, the Director of OMB is directed (sec. 301) to
prepare a study on the historical use of various terms relating
to the collection of monies by the Federal Government. The
Director of CBO is required to review the OMB report and
provide recommendations to Congress.
The budget displays revenues (primarily tax collections)
and outlays (primarily disbursements of cash). The proper
characterization of revenues and spending is important both for
the purposes of Congress' carrying out its power of the purse,
and also provides important information to the public regarding
the amount of money collected from the private sector and how
this money is spent.
The 1967 President's Commission on Budget Concepts
continues to provide the foundation for determining the
treatment of transactions in the Federal budget. Generally,
Federal collections resulting from the exercise of the Federal
Government's sovereign power are classified as revenues (or
``receipts''). Those collections resulting from business-like
activity performed by the Federal Government are recorded as
negative spending (or ``offsetting collections''). Over the
years, however, these terms have become jumbled as programs
have evolved and as statutes have dictated the budgetary
treatment of Federal collections. Increasingly, collections
that result from the government's sovereign power are being
classified as offsetting collections (negative spending). The
study should review the theoretical bases of these terms, the
evolution of the classification of collections, the current
classification of Federal collections, and provide
recommendations on the future application of such terms.
Legislative History
Fair Value Accounting
The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-
508) added the Federal Credit Reform Act of 1990 (FCRA) as
Title V of the Congressional Budget and Impoundment Control Act
of 1974 (Congressional Budget Act). FCRA changed how the
unified budget reports the cost of Federal credit activities.
Prior to fiscal year 1992, the unified budget measured the cost
of Federal credit on a cash-flow basis. This methodology did
not accurately portray the true cost of a loan or loan
guarantee when the obligation is incurred.
Under cash-flow budgeting, disbursements of a direct loan
are recorded upfront as outlays at the time of disbursement,
while repayments are recorded over the life of the loan. By
contrast, an economically equivalent loan guarantee would show
no upfront cost and might even show an upfront savings because
of origination fees paid by the loan guarantee recipient. Cash-
flow accounting thus favored loan guarantees over direct loans
even though both could be structured to pose an equivalent
financial risk to the Federal Government.
Cash-flow accounting also failed to accurately capture the
full costs of credit programs generally and increased the
difficulty of comparing the costs of credit programs and non-
credit programs thus distorting fiscal decision-making. The
economically accurate budgetary measure of the costs of
supplying Federal credit is the net present value of the
subsidies to credit recipients measured at the time the credit
is advanced, re-estimated over the life of the credit
extension. FCRA was enacted in order to achieve this more
economically appropriate budgetary treatment.
FCRA, however, understates the true cost to the Federal
Government because it discounts the cash flows over the life of
a loan or loan guarantee using interest rates on Treasury
securities. This is essentially the risk-free rate of interest.
The loans and loan guarantees issued by the Federal
Government are not free of risk. To the contrary, the extension
of Federal credit to the private sector entails the assumption
by the Federal Government of market risk. Market risk is in
addition to the risk that a credit beneficiary may default,
because of individual circumstances. Market risk, also known as
systematic risk, arises from the correlation between broader
market and economic conditions and the probability of any
particular credit program performing as predicted. In order to
capture the cost to the Federal Government of this risk, fair
value accounting is a better approach. The principal difference
between the FCRA approach and a fair value approach is the
discount rate used to calculate the present value of the future
costs of the extension of credit by the Federal Government. As
CBO has testified, ``The fair-value approach produces estimates
of the value of assets and liabilities that either correspond
to or approximate market prices.''\5\
---------------------------------------------------------------------------
\5\Statement of Deborah Lucas, Assistant Director for Financial
Analysis, ``The Budgetary Cost of Fannie Mae and Freddie Mac and
Options for the Future Federal Role in the Secondary Mortgage Market,''
p. 3 June 2, 2011, http://www.cbo.gov/sites/default/files/cbofiles/
ftpdocs/122xx/doc12213/06-02-gses_testimony.pdf.
---------------------------------------------------------------------------
In 2008, Congress enacted the ``Emergency Economic
Stabilization Act of 2008'' (EESA) (P.L. 110-343). EESA
authorized the Federal Government to purchase troubled
mortgage-related assets, under the Troubled Assets Relief
Program (TARP) of that bill. Congress recognized that recording
these transactions on a cash basis would over-state their
actual cost, but recording them under FCRA would not fully
account for their costs. As a result, the EESA provides that
the activities under TARP would be recorded in the Federal
budget under the Federal Credit Reform Act of 1990 modified to
use a risk-adjusted discount rate.
In the President's fiscal year 2010 budget, the
administration proposed there be no budget impact recorded from
U.S. contributions to the International Monetary Fund (IMF).
The Budget Committees rejected this proposal, but recognized
that the current budgetary treatment of recording budget
authority with zero impact on spending and deficits was flawed.
After reviewing the issue, the Budget Committees concluded that
FCRA adjusted for market risk was the best measure of recording
the impact of contributions to the IMF on the budget.
The Supplemental Appropriations Act of 2009 (P.L. 111-32)
included a provision incorporating fair value accounting
standards to adequately account for market risk for the
purposes of transactions dealing with the IMF.\6\ That measure
included the following language modifying the application of
current law Federal Credit Reform Act accounting:
---------------------------------------------------------------------------
\6\Supplemental Appropriations Act, 2009 (H.R. 2346), Public Law
111-32, June 24, 2009. In addition, additional information on the
budgetary treatment of the IMF can be found at: Congressional Budget
Office, ``Budget Implications of U.S. Contributions to the
International Monetary Fund,'' Director's Blog, May 19, 2009, http://
cboblog.cbo.gov/?p=270.
---------------------------------------------------------------------------
[F]or purposes of section 502(5) of the Federal Credit
Reform Act of 1990, the discount rate in section 502(5)(E)
shall be adjusted for market risks: Provided further, That
section 504(b) of the Federal Credit Reform Act of 1990 (2
U.S.C. 661c(b)) shall not apply.
Government-Sponsored Enterprises
Fannie Mae and Freddie Mac are government-sponsored
enterprises (GSEs) that were chartered by Congress to
facilitate the availability of financing for home mortgages.
Fannie Mae was first established as a government agency in 1938
as part of the New Deal. In 1968, it was removed from the
Federal budget and recreated as a government-sponsored
enterprise and became a publicly traded company. Though there
was widely assumed to be an ``implicit'' Federal guarantee of
Fannie Mae's and Freddie Mac's debt, their securities are
denied an explicit guarantee.
They carry out the function of financing home mortgages by
purchasing home loans from mortgage originators and packaging
those loans into mortgage-backed securities, which are then
sold on to private sector investors with a guarantee from
Fannie Mae or Freddie Mac against losses from any defaults on
the underlying mortgages. Fannie Mae and Freddie Mac also keep
a portion of these MBS in their own investment portfolio, which
they finance through the issuance of debt securities, widely
known as ``agency debt.'' This agency debt is required by
statute to include a disclaimer that such obligations together
with the interest thereon are not guaranteed by the United
States and do not constitute a debt obligation of the United
States.\7\
---------------------------------------------------------------------------
\7\See 12 U.S.C. 1721 and 12 U.S.C. 1455.
---------------------------------------------------------------------------
On September 6, 2008, using the authority provided under
the Housing and Economic Recovery Act of 2008 (P.L. 110-289),
the Federal Housing Finance Agency (FHFA) placed Fannie Mae and
Freddie Mac into conservatorships. The purpose of the
conservatorships is to ``stabilize [the] troubled institutions
with the objective of maintaining normal business operations
and restoring financial safety and soundness.''\8\ At the same
time, the Department of the Treasury entered into agreements
with the GSEs known as Senior Preferred Stock Purchase
Agreements (PSPA). The PSPAs are legally binding agreements by
which Treasury is obligated to provide sufficient capital to
keep the net worth of Fannie Mae and Freddie Mac from falling
below zero. In return, the government received senior preferred
stock and warrants making the Treasury the effective owner of
the GSEs. The Committee received testimony in June 2011 from
the Congressional Budget Office stating that:
---------------------------------------------------------------------------
\8\Federal Housing Finance Agency--Office of Conservatorship
Operations http://www.fhfa.gov/Default.aspx?Page=344, (accessed Jan.
20, 2012).
---------------------------------------------------------------------------
Between November 2008 and the end of March 2011, the
government provided about $154 billion in capital to Fannie Mae
and Freddie Mac and received more than $24 billion in dividends
on its preferred stock, resulting in net payments to the GSEs
of $130 billion. CBO expects additional net cash payments from
the government over the next several years.
In CBO's judgment, the Federal conservatorship of Fannie
Mae and Freddie Mac and their resulting ownership and control
by the Treasury make the two entities effectively part of the
government and imply that their operations should be reflected
in the Federal budget.\9\
---------------------------------------------------------------------------
\9\Statement of Deborah Lucas, Assistant Director for Financial
Analysis, ``The Budgetary Cost of Fannie Mae and Freddie Mac and
Options for the Future Federal Role in the Secondary Mortgage Market,''
p. 2, June 2, 2011, available at http://www.cbo.gov/sites/default/
files/cbofiles/ftpdocs/122xx/doc12213/06-02-gses_testimony.pdf.
---------------------------------------------------------------------------
After consultation with the Budget Committees, CBO began to
include the operations of Fannie Mae and Freddie Mac in its
baseline budget projections and chose to use fair value
methodology for estimating. By contrast, the Obama
Administration has continued to regard these entities as non-
governmental for budgetary purposes and records in the budget
only the cash transfers between the Treasury and the GSEs. This
treatment understates the costs of these entities to the
Federal Government. As CBO testified: ``That approach can
postpone for many years the recognition of the costs of new
obligations. Subsidized mortgage guarantees may even show gains
for the government in the short term because fees are collected
up front but losses are realized over time as defaults
occur.''\10\ In 2013, the GSEs made $97 billion of payments to
the Treasury, which were recorded as reducing the budget
deficit. However, the $104.4 billion increase in contingent
liabilities assumed by the GSEs during this period are nowhere
reflected in the budget as maintained by the Administration.
---------------------------------------------------------------------------
\10\Ibid.
---------------------------------------------------------------------------
Studies Conducted by the OMB and CBO on Fair Value Concepts
The bill calls on CBO and OMB to review other insurance
programs to determine the possible application of fair value
accounting to record their costs in a full and transparent
manner.
As this Committee noted in 1998:
Cash budgeting provides incomplete and misleading cost
information for those programs because, for most insurance
contracts, premiums are paid long before claims are made. Under
current budget conventions, legislation affecting Federal
insurance programs often is seen as providing savings even
though it expands insurance coverage and increases the
likelihood that the cost of claims over time will be higher
than expected in the absence of the legislation. Such
situations can occur when the legislation increases premiums
today; but claims due under the higher coverage would not be
paid until future fiscal years--often well beyond the budget
window although over the years there has been a growing trend
in moving to accrual budgeting for the contingent liabilities
of the Federal Government.\11\
---------------------------------------------------------------------------
\11\House Report 106-198--Part 2--p. 58, The Comprehensive Budget
Process Reform Act of 1999, available at http://www.gpo.gov/fdsys/pkg/
CRPT-106hrpt198/pdf/CRPT-106hrpt198-pt2.pdf.
---------------------------------------------------------------------------
In the same report, the Committee noted:
Interest in budgeting for contingent liabilities predates
the congressional budget process. In August 1956, Congress
enacted a bill that required agency accounts to be maintained
on an accrual basis `[a]s soon as practicable * * *' (S. 3897,
Ch. 814-P.L. 863). The issue of unfunded liabilities and
accrual budgeting was addressed in hearings of the Joint
Committee on Budget Control in 1973.
Legislation in the 112th Congress
On December 7, 2011, Members of the House Budget Committee
introduced a comprehensive package of ten legislative budget
process reform bills designed to fundamentally reform the
budget process. Included in this package was H.R. 3581, the
``Budget and Accounting Transparency Act of 2012,'' introduced
by Representative Scott Garrett of New Jersey. On February 7,
2012, H.R. 3581, the ``Budget and Accounting Transparency Act
of 2012,'' passed the House of Representatives by a 245-180
vote.
Legislation in the 113th Congress
On May 8, 2013, Members of the House Budget Committee
introduced a comprehensive package of seven legislative budget
process reform bills designed to fundamentally reform the
budget process. Included in this package was H.R. 1872, the
``Budget and Accounting Transparency Act of 2014,'' introduced
by Representative Scott Garrett of New Jersey.
Hearings
In 2011, the House Budget Committee held hearings on budget
process reform and one of those hearings focused on the Federal
Credit Reform Act and its application to housing programs.
The hearing involving fair value, ``Fannie Mae, Freddie Mac
and FHA: Taxpayer Exposure in the Housing Markets,'' was held
on June 2, 2011, with Deborah J. Lucas (Congressional Budget
Office), Alex J. Pollock (American Enterprise Institute) and
Sarah Rosen Wartell (Center for American Progress and Center
for American Progress Action Fund).
The first budget process hearing, ``The Broken Budget
Process: Perspectives From Former CBO Directors,'' was held on
September 21, 2011, with former CBO Directors Rudolph Penner
and Alice Rivlin testifying.
The second budget process hearing, ``The Broken Budget
Process: Perspectives From Budget Experts,'' was held on
September 22, 2011, with Philip Joyce (University of Maryland),
the Honorable Jim Nussle (Chairman of the Committee on the
Budget, 2001 through 2007, United States House of
Representatives) and the Honorable Phil Gramm (former United
States Senator, 1985-2002) testifying.
Section by Section
Section 1. Short Title.
Section 1 establishes the short title of the bill as the
``Budget and Accounting Transparency Act of 2014''.
Title I--Fair Value Estimates
Section 101. Credit Reform.
Section 101 amends the Congressional Budget Act of 1974
(CBA) by striking the existing Title V and replacing it with
the following new text:
Section 500. Short Title.
This section establishes the short title of this title as
the ``Fair Value Accounting Act of 2014''.
Section 501. Purposes.
Section 501 sets forth the purposes of this title are to
(1) measure more accurately the costs of Federal credit
programs by accounting for them on a fair value basis, (2)
place the cost of credit programs on a budgetary basis
equivalent to other Federal spending, (3) encourage the
delivery of benefits in the form most appropriate to the needs
of beneficiaries, and (4) improve the allocation of resources
among Federal programs.
Section 502. Definitions.
Section 502 defines the following terms used in this title:
direct loan, direct loan obligation, loan guarantee, loan
guarantee commitment, cost, program account, financing account,
liquidating account, modification, current, Director,
administrative costs, and essential preservation expenses.
``Cost'' is defined as the sum of (1) the Treasury
discounting component and (2) the risk component of a direct
loan or loan guarantee, or a modification thereof. The Treasury
discounting component is the estimated long-term cost to the
Government of a direct loan or loan guarantee, or modification
thereof, calculated on a net present value basis discounted at
the Treasury borrowing rate. The risk component is the amount
equal to the difference between the estimated long-term cost to
the Government of a direct loan or loan guarantee, or
modification thereof, estimated on a fair value basis, applying
the guidelines set forth by the Financial Accounting Standards
Board in Financial Accounting Standard Statement #157 and the
Treasury discounting component of such a direct loan or loan
guarantee, or modification thereof. Both components exclude
administrative costs and any incidental effects on Government
receipts or outlays.
Section 503. OMB and CBO Analysis, Coordination, and Review.
Subsection (a) requires, for the executive branch, the OMB
Director to coordinate estimates and consult with agencies that
administer direct loans or loan guarantee programs.
Subsection (b) permits the OMB Director to delegate to
agencies the authority to make estimates of costs as long as
such delegation of authority is based upon written guidelines,
regulations, or criteria consistent with the definitions in
this title.
Subsections (c) and (d) require the OMB Director, in
developing estimation guidelines, regulations, or criteria to
be used by Federal agencies, to consult with the CBO Director
and to coordinate the development of more accurate data on
historical performance and prospective risk of direct loan and
loan guarantee programs. Subsection (d) also requires the
Directors of OMB and CBO to annually review the performance of
outstanding direct loans and loan guarantees to improve
estimates of costs.
Subsection (e) requires the OMB Director to review
historical data and develop the best possible estimates of
adjustments that would convert aggregate historical budget data
to credit reform accounting.
Section 504. Budgetary Treatment.
Subsection (a) requires that beginning with fiscal year
2017, the President's budget shall reflect the costs of direct
loan and loan guarantee programs and include the planned level
of new direct loan obligations or loan guarantee commitments
associated with each appropriations request. Additionally,
subsection (a) requires for each fiscal year, within the five-
fiscal year period for such budget to include, on an agency-by-
agency basis, subsidy estimates and costs of direct loan and
loan guarantee programs with and without the risk component.
This five-year requirement may be satisfied by including this
information in the Federal Credit Supplement to the President's
budget request.
Subsection (b) requires that new budget authority be
provided by appropriation in advance before new direct loans or
loan guarantee commitments are incurred.
Subsection (c) provides that direct loan or loan guarantee
programs constituting an entitlement, or existing credit
programs of the Commodity Credit Corporation on the date of
enactment of this title, or made by Fannie Mae or Freddie Mac
are exempt from the requirements of subsection (b), which
requires the appropriation of new budget authority for direct
loans and loan guarantees, and of subsection (e), which
prohibits modifications of direct loans or loan guarantees in a
manner that increases costs unless additional budget authority
has been appropriated in advance.
Subsection (d) provides that the authority to incur new
direct loan obligations, make new loan guarantee commitments,
or modify outstanding direct loans or loan guarantees
constitutes new budget authority in an amount equal to the cost
of the direct loan or loan guarantee in the fiscal year in
which definite authority becomes available or indefinite
authority is used. Such budget authority constitutes an
obligation of the program account to pay to the financing
account. The outlays resulting from new budget authority for
the cost of direct loans or loan guarantees will be paid from
the program account into the financing account and recorded in
the fiscal year in which the direct loan or guaranteed loan is
disbursed or its costs altered.
Subsection (e) prohibits modifications of direct loans (or
direct loan obligations) or loan guarantees (or loan guarantee
commitments) in a manner that increases costs unless additional
budget authority has been appropriated in advance.
Subsection (f) provides that when the estimated cost for a
group of direct loans or loan guarantees for a specific program
made in a fiscal year is re-estimated in a subsequent year,
that the additional cost will be displayed as a distinct and
separately identified subaccount in the program account as a
change in program costs and a change in net interest.
Subsection (f) also provides permanent indefinite authority for
these re-estimates.
Subsection (g) requires all funding for an agency's
administrative costs associated with a direct loan or loan
guarantee program to be displayed as distinct and separately
identified subaccounts within the same budget account as the
program's cost.
Section 505. Authorizations.
Subsections (a) and (b) authorize the President to
establish non-budgetary accounts as may be appropriate to
implement the accounting required and direct the Secretary of
the Treasury to borrow, receive, lend, or pay to the financing
accounts such amounts as may be appropriate.
Subsection (b) requires for guaranteed loans financed by
the Federal Financing Bank and treated as direct loans by a
Federal agency pursuant to section 406(b)(1), any fee or
interest surcharge (that exceeds the Treasury discounting
component of the cost) the Federal Financing Bank charges to a
private borrower pursuant to section 6(c) of the Federal
Financing Bank Act of 1973 be considered a cash flow to the
Government for the purposes of determining the cost of the
direct loan pursuant to section 502(5). All such amounts shall
be credited to the appropriate financing account.
Subsection (b) also authorizes the Federal Financing Bank
to require reimbursement from a Federal agency to cover the
administrative expenses of the Federal Financing Bank that are
attributable to the direct loans financed for that agency. All
such payments by an agency shall be considered administrative
expenses subject to section 504(g) and apply to direct loan
obligations or loan guarantee commitments made on or after
October 1, 1991. Subsection (b) also provides that the
authorities provided in this subsection shall not be construed
to supersede or override the authority of the head of a Federal
agency to administer and operate a direct loan or loan
guarantee program.
Subsection (b) also requires that these transactions be
subject to the provisions of subchapter II of chapter 15 of
title 31, United States Code, dealing with the apportionment of
funds.
Subsection (b) also requires that excess cash balances be
maintained in a form of un-invested funds and the Secretary of
the Treasury shall pay interest on these funds. The Secretary
shall charge (or pay if the amount is negative) financing
accounts an amount equal to the risk component for a direct
loan or loan guarantee, or modification thereof. This amount
shall be a means of financing and shall not be considered a
cash flow of the Government for the purposes of section 502(5).
Subsection (c) requires that amounts in liquidating
accounts only be available for payments resulting from direct
loan obligations or loan guarantee commitments made prior to
October 1, 1991, for payments necessary for the liquidation of
such direct loan obligations and loan guarantee commitments.
The amounts credited to liquidating accounts are available only
for payments required in that year and shall be transferred to
miscellaneous receipts after the end of the fiscal year.
Subsection (c) also provides permanent, indefinite
authority to make any payments required if the funds in the
liquidating accounts are insufficient to satisfy obligations
and commitments of such accounts.
Subsection (d) provides that nothing in this title shall be
construed as authorizing or requiring the purchase of insurance
or reinsurance on a direct loan or loan guarantee from private
insurers. If any such reinsurance for a direct loan or loan
guarantee is authorized, the cost of such insurance and any
recoveries to the Government shall be included in the
calculation of the cost.
Subsection (e) provides that nothing in this title shall be
construed to change the authority or the responsibility of a
Federal agency to determine the terms and conditions of
eligibility for, or the amount of assistance provided by a
direct loan or loan guarantee.
Section 506. Treatment of Deposit Insurance and Agencies and Other
Insurance Programs.
Section 506 provides that this title shall not apply to the
credit or insurance activities of the Federal Deposit Insurance
Corporation, National Credit Union Administration, Resolution
Trust Corporation, Pension Benefit Guaranty Corporation,
National Flood Insurance, National Insurance Development Fund,
Crop Insurance, or Tennessee Valley Authority.
Section 507. Effect on Other Laws.
Subsection (a) provides that this title shall supersede,
modify, or repeal any provision of law enacted prior to the
date of enactment of this title to the extent such provision is
inconsistent with this title and that nothing in this title
shall be construed to establish a credit limitation on any
Federal loan or loan guarantee program.
Subsection (b) provides that collections resulting from
direct loans obligated or loan guarantees committed prior to
October 1, 1991, shall be credited to the liquidating accounts
of Federal agencies.
This section also makes a technical and conforming
amendment to the table of contents of the CBA.
Section 102. Budgetary Adjustment.
Subsection (a) makes explicit that the move from accounting
for loans and loan guarantees on a Federal Credit Reform basis
to a fair value basis constitutes a change in concept for
purposes of section 251(b)(1) of the Balanced Budget and
Emergency Deficit Control Act of 1985. This will result in the
Director of OMB adjusting the caps on discretionary spending in
section 251(c) of that Act to account for the change in
concept.
Subsection (b) requires OMB, before adjusting the
discretionary caps, to report to the House and Senate Budget
Committees the amount of the prospective adjustment, the
methodology used in determining the size of that adjustment,
and provide a program-by-program itemization of the components
of the adjustment.
Subsection (c) prohibits OMB from making an adjustment
sooner than 60 days after providing the report required above.
Section 103. Effective Date.
Section 103 provides that the amendments made by section
101 shall take effect beginning with fiscal year 2017.
Title II--Budgetary Treatment.
Section 201. CBO and OMB Studies Respecting Budgeting for Costs of
Federal Insurance Programs.
Section 201 requires CBO and OMB to each prepare a study
and make recommendations to the House and Senate Budget
Committees as to the feasibility of applying fair value
concepts to budgeting for the costs of Federal insurance
programs. The report is due within one year of the enactment of
this bill.
Section 202. On-Budget Status of Fannie Mae and Freddie Mac.
Section 202 requires the receipts and disbursements,
including the administrative expenses, of Fannie Mae and
Freddie Mac to be counted as new budget authority, outlays,
receipts, or deficit or surplus for the purposes of the budget
of the US government as submitted by the President; the
congressional budget; and the Balanced Budget and Emergency
Deficit Control Act of 1985.
Section 203. Effective Date.
Section 203 allows for the removal of Fannie Mae and
Freddie Mac from the Federal budget once three conditions are
met: (1) the conservatorship for such enterprise has been
terminated; (2) the regulator of the enterprise has certified
in writing that the enterprise has repaid as much aid to the
Federal Government as is consistent with minimizing the total
cost to the Federal Government of the conservatorship; and (3)
the charter for the enterprise has been revoked, annulled, or
terminated and the authorizing statute with respect to the
enterprise has been repealed.
Title III--Budget Review and Analysis.
Section 301. CBO and OMB Review and Recommendations Respecting Receipts
and Collections.
Section 301 requires OMB to prepare a study of the history
of offsetting collections against expenditures and the amount
of receipts collected annually, the historical application of
the budgetary terms ``revenue'', ``offsetting collections'' and
``offsetting receipts'', and review the current application of
those terms. CBO is required to review this study. Both CBO and
OMB are then each required to make recommendations to the House
and Senate Budget Committees of whether such usage should be
continued or modified. The report is due within one year of the
enactment of this bill.
Section 302. Agency Budget Justifications.
Section 302 requires agencies to make available on its
public website all budget justification materials provided to
Congress on the same day such justification is submitted to
Congress. These materials are required to include information
on the process and methodology the agency is using to comply
with the Fair Value Accounting Act of 2014. OMB is also
required to post these materials in a central location on its
website. The materials must be searchable, sortable, and
downloadable by the public; consistent with generally accepted
standards and practices for machine-discoverability; organized
uniformly; and use uniform identifiers.
Section 302 also requires OMB to submit a written report to
the House and Senate Budget Committees containing the OMB
issued guidance to agencies on how to calculate the risk
component under the Fair Value Accounting Act of 2014 no later
than the day OMB issues such guidance to agencies. Such
guidance is deemed to be a rule for purposes of section 553 of
title 5 and can be issued only through a notice and comment
rulemaking procedure.
Section 302 also requires the Comptroller General to submit
an annual report, for fiscal year 2017 and the four ensuing
fiscal years, to the House and Senate Budget Committees which
reviews and evaluates the progress of agencies in the
implementation of the Fair Value Accounting Act of 2014.
Votes of the Committee
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires each committee report to accompany any
bill or resolution of a public character to include the total
number of votes cast for and against each roll call vote, on a
motion to report and any amendments offered to the measure or
matter, together with the names of those voting for and
against.
Listed below are the actions taken by the Committee on the
Budget of the House of Representatives on the Budget and
Accounting Transparency Act of 2014.
On February 11, 2014, the committee met in open session, a
quorum being present.
Chairman Ryan asked unanimous consent to be authorized,
consistent with clause 4 of rule XVI of the Rules of the House
of Representatives, to declare a recess at any time during the
committee meeting.
There was no objection to the unanimous consent request.
Chairman Ryan asked unanimous consent to dispense with the
first reading of the bill and the bill be considered as read
and open to amendment at any point.
There was no objection to the unanimous consent request.
The committee adopted and ordered reported favorably the
Budget and Accounting Transparency Act of 2014.
The committee took the following votes:
Amendment in the Nature of a Substitute Offered by Mr. Garrett
1. The amendment was offered in the nature of a substitute
to H.R. 1872 and was made in order as original text. The
amendment changes the effective date of this bill from fiscal
year 2015 to fiscal year 2017. The amendment also enhances the
transparency of estimates produced under a fair-value system
and incorporates more opportunities for public input in the
process.
The amendment was agreed to by voice vote.
Final Passage
2. Dr. Price made a motion that the committee report the
bill as amended and that the bill do pass.
The motion was agreed to by a roll call vote of 17 ayes and
8 noes.
------------------------------------------------------------------------
Name & Answer Name & Answer
State Aye No Present State Aye No Present
------------------------------------------------------------------------
RYAN, X VAN X
PAUL HOLLEN
(WI) (MD)
(Chairma (Ranking
n) )
------------------------------------------------------------------------
PRICE X SCHWARTZ
(GA) (PA)
------------------------------------------------------------------------
GARRETT X YARMUTH X
(NJ) (KY)
------------------------------------------------------------------------
CAMPBELL PASCRELL
(CA) (NJ)
------------------------------------------------------------------------
CALVERT X RYAN, TIM
(CA) (OH)
------------------------------------------------------------------------
COLE (OK) X MOORE X
(WI)
------------------------------------------------------------------------
McCLINTOC X CASTOR
K (CA) (FL)
------------------------------------------------------------------------
LANKFORD McDERMOTT
(OK) (WA)
------------------------------------------------------------------------
BLACK LEE (CA)
(TN)
------------------------------------------------------------------------
RIBBLE X CICILLINE
(WI) (RI)
------------------------------------------------------------------------
FLORES X JEFFRIES X
(TX) (NY)
------------------------------------------------------------------------
ROKITA X POCAN X
(IN) (WI)
------------------------------------------------------------------------
WOODALL X LUJAN X
(GA) GRISHAM
(NM)
------------------------------------------------------------------------
BLACKBURN HUFFMAN X
(TN) (CA)
------------------------------------------------------------------------
NUNNELEE X CARDENAS
(MS) (CA)
------------------------------------------------------------------------
RIGELL X BLUMENAUE
(VA) R (OR)
------------------------------------------------------------------------
HARTZLER X SCHRADER X
(M0) (OR)
------------------------------------------------------------------------
WALORSKI X .........
(IN)
------------------------------------------------------------------------
MESSER X .........
(IN)
------------------------------------------------------------------------
RICE (SC) X .........
------------------------------------------------------------------------
WILLIAMS X .........
(TX)
------------------------------------------------------------------------
DUFFY
(WI)
------------------------------------------------------------------------
Representative Black requested that the record reflect she
would have voted aye on the roll call vote had she been
present.
Dr. Price made a motion that, pursuant to clause 1 of rule
XXII of the Rules of the House of Representatives, the staff be
authorized to make any necessary technical and conforming
changes to the bill.
The motion was agreed to without objection.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee on the Budget's
oversight findings and recommendations are reflected in the
body of this report.
Budget Act Compliance
The provisions of clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives and section 308(a)(1) of the
Congressional Budget Act of 1974 (relating to estimates of new
budget authority, new spending authority, new credit authority,
or increased or decreased revenues or tax expenditures) are not
considered applicable. The estimate and comparison required to
be prepared by the Director of the Congressional Budget Office
under clause 3(c)(3) of rule XIII of the Rules of the House of
Representatives and sections 402 and 423 of the Congressional
Budget Act of 1974 submitted to the committee prior to the
filing of this report are as follows:
Congressional Budget Office,
U.S. Congress,
Washington, DC, February 12, 2014.
Hon. Paul Ryan, Chairman,
Committee on the Budget, U.S. House of Representatives, Washington, DC
20515.
Dear Mr. Chairman: The Congressional Budget Office has prepared the
enclosed cost estimate for H.R. 1872, the Budget and Accounting
Transparency Act of 2014.
If you wish further details on this estimate, we will be pleased to
provide them. The CBO staff contact is Chad Chirico, who can be reached
at 226-2820.
Sincerely,
Douglas W. Elmendorf, Director.
Enclosure.
cc: Hon. Chris Van Hollen, Ranking Member.
congressional budget office cost estimate
february 12, 2014
H.R. 1872: Budget and Accounting Transparency Act of 2014
As ordered reported by the House Committee on the Budget on February
11, 2014
SUMMARY
H.R. 1872 would modify the budgetary treatment of federal credit
programs. Specifically, the bill would amend the Federal Credit Reform
Act of 1990 (FCRA) to require that, beginning in fiscal year 2017, the
cost of direct loans or loan guarantees be recognized in the federal
budget on a fair-value basis using guidelines set forth by the
Financial Accounting Standards Board. A fair-value approach to
accounting for the cost of federal loans and loan guarantees would
produce estimates of costs that either correspond to or approximate the
value of those loans or guarantees to buyers in the private market.
The bill also would require that the Government Accountability
Office (GAO) produce annual reports on the progress that federal
agencies make in its implementation; the federal budget reflect the net
impact of programs administered by Fannie Mae and Freddie Mac; federal
agencies post budget justifications on public websites on the same day
they are submitted to the Congress; and the Office of Management and
Budget (OMB) and the Congressional Budget Office (CBO) prepare studies
on the costs of federal insurance programs and the historical
application of the budgetary terms revenue, offsetting collections, and
offsetting receipts.
The proposed changes to the budgetary treatment of federal credit
programs would increase the estimated costs of such programs compared
to measures used under current law. (This legislation would not change
the terms of such credit programs, but would change what is recorded in
the budget as the cost of credit assistance.) CBO estimates that if
fair-value procedures were used to estimate the cost of new credit
activity in 2014, the total deficit for the year would be about $50
billion greater than the deficit as measured under current estimating
procedures. Because that increased cost would stem from a change in
concepts and definitions used to prepare federal budget documents
rather than a change in agencies' legal authority to operate credit
programs, it would not be an additional cost attributed to H.R. 1872
for Congressional budget enforcement procedures.
CBO estimates that measuring the cost of federal credit programs on
a fair-value basis as prescribed under H.R. 1872 would increase
agencies' administrative costs to operate such programs. In addition,
the requirements to post budget justifications on the Internet and
produce studies would require additional resources. Assuming
appropriation of the necessary amounts, CBO estimates such costs would
total $16 million over the 2014-2019 period. Pay-as-you-go procedures
do not apply to this legislation because no additional direct spending
would be attributable to H.R. 1872 since it would not change credit
programs. The legislation would not affect revenues.
H.R. 1872 contains no intergovernmental or private-sector mandates
as defined in the Unfunded Mandates Reform Act (UMRA) and would impose
no costs on state, local, or tribal governments.
ESTIMATED COST TO THE FEDERAL GOVERNMENT
The estimated budgetary impact of H.R. 1872 is shown in the
following table. The costs of this legislation fall within all budget
functions that include administrative costs associated with federal
credit programs.
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2014-2019
----------------------------------------------------------------------------------------------------------------
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Estimated Authorization Level....................... * 5 5 2 2 2 16
Estimated Outlays................................... * 5 5 2 2 2 16
----------------------------------------------------------------------------------------------------------------
Note: * = less than $500,000.
BASIS OF ESTIMATE
Agencies would face various administrative challenges to develop
and execute new requirements that would be imposed by a change in
budgetary treatment for credit programs. CBO estimates that the
procedures prescribed by the bill would require federal agencies that
administer credit programs to update their accounting and budget
preparation systems, procure advisory services, and hire additional
staff with expertise in financial asset valuation. In addition, the
bill's requirement that all agencies post uniform, searchable, and
sortable budget justifications and that OMB, CBO, and GAO produce
reports would increase administrative costs. Based on information about
the cost of carrying out similar activities and information from some
federal agencies that operate major credit programs, CBO estimates that
implementing H.R. 1872 would cost $16 million over the next five years,
assuming appropriation of the necessary amounts.
COMPARISON OF ALTERNATIVE BUDGETARY TREATMENTS OF CREDIT PROGRAMS
The federal government provides credit assistance in the form of
direct loans and guaranteed loans. Most of that assistance is offered
through a few large programs; together, the Federal Housing
Administration's (FHA's) mortgage guarantee programs and the Department
of Education's student loan programs account for about 65 percent of
outstanding federally backed credit.\1\ Other major credit programs
include the Department of Veterans Affairs' mortgage guarantee
programs, the Department of Agriculture's credit programs for rural
utilities, and the Small Business Administration's loan and loan
guarantee programs. About 100 smaller credit programs currently provide
assistance for a variety of other activities including international
trade and investments in new energy technologies.
---------------------------------------------------------------------------
\1\The term federally backed credit is used to encompass all
federal loan and loan guarantee programs. For this cost estimate, these
programs do not include the credit assistance provided by Fannie Mae or
Freddie Mac, or the Troubled Asset Relief Program.
---------------------------------------------------------------------------
H.R. 1872 would amend FCRA to modify procedures for calculating the
budgetary cost of federally backed credit programs. As discussed below,
such changes would increase the estimated cost of such programs for
budget purposes, thereby increasing the estimates of future deficits.
FCRA PROCEDURES
FCRA specifies that the budgetary cost of federally backed credit
programs are calculated and recorded on an accrual basis--unlike most
items in the federal budget, which are shown on a cash basis. The main
distinction between cash and accrual accounting is that, whereas under
cash accounting expenditures are recorded in the years when cash
payments are made, on an accrual basis the estimated lifetime cost of a
direct loan or loan guarantee is recognized in the year when the loan
is approved.
Under FCRA, the budgetary impact--or subsidy cost--of a direct loan
or loan guarantee is calculated as the net present value of expected
cash flows over the life of the loan. For a direct loan, net cash flows
include payments of principal, interest, and any fees paid by the
borrower less any amounts lost due to borrower default. For a loan
guarantee, fees collected from the borrower and guarantor, and payments
made to make the guarantor whole if the borrower defaults would be
included in the cash flows. The net present value is estimated by
discounting the expected cash flows to the time of loan disbursement.
FCRA specifies that discounting calculations use the interest rates on
Treasury securities with maturities comparable to the terms of loans.
For example, cash flows projected in the year following disbursement
are discounted using the rate for one-year Treasury securities; those
five years out are discounted using a five-year rate; and so on.
COST OF CREDIT PROGRAMS UNDER FCRA
Over the 2000-2007 period, the face value of loans made or
guaranteed by the federal government (known as the aggregate volume of
credit activity) averaged $300 billion and estimated subsidy costs
under FCRA averaged $6.4 billion annually--for a net, average subsidy
rate of 2 percent of aggregate loan volume. In contrast, the aggregate
subsidy rate for programs covered by FCRA was negative in each fiscal
year over the 2008-2013 period; that is, the government's lending
activities generated an accounting profit which reduced measures of
budget deficits in those years. That swing from positive to negative
FCRA subsidies stemmed primarily from legislative and programmatic
changes to student loans and FHA mortgage insurance. For 2013, CBO
estimates that programs covered by FCRA reduced the deficit by $45
billion.
FAIR-VALUE PROCEDURES
H.R. 1872 would require that subsidy estimates for federal credit
programs be calculated on a fair-value basis. The Financial Accounting
Standards Board defines the fair value of a loan as the price that
would be received if it were sold in a competitive market. Similarly,
the fair value of a loan guarantee is the price that would have to be
paid to induce a market participant to assume the guarantee commitment.
In practice, differences between FCRA estimates and fair-value
estimates stem from differences in the effective discount rates used to
calculate the present value of future cash flows. While FCRA requires
that subsidy calculations use Treasury rates to discount future cash
flows, fair-value estimates employ rates that also incorporate a
premium for market risk. Private investors require additional
compensation for market risk because investments exposed to such risk
are more likely to have low returns when the economy as a whole is weak
and resources are scarce and highly valued. By incorporating a market-
based risk premium, fair-value estimates would recognize that the
government's assumption of financial risk involves costs that exceed
the average amount of losses that would be expected from defaults.
COST OF CREDIT PROGRAMS UNDER H.R. 1872
A consequence of switching to fair-value accounting is that the
estimated budgetary cost of credit programs would appear higher than
under FCRA. CBO has provided detailed supplementary information to the
Congress about the fair-value cost of certain federal credit and
insurance programs and how they compare to FCRA estimates, including an
analysis of the cost of all federal credit programs in 2013.\2\
---------------------------------------------------------------------------
\2\Fair-Value Estimates of the Cost of Federal Credit Programs in
2013 (June 2012), www.cbo.gov/sites/default/files/cbofiles/attachments/
06-28-FairValue.pdf
Costs and Policy Options for Federal Student Loan Programs (March
2010), www.cbo.gov/ftpdocs/110xx/doc11043/03-25-StudentLoans.pdf
Accounting for FHA's Single-Family Mortgage Insurance Program on a
Fair-value Basis (May 18, 2011), www.cbo.gov/ftpdocs/120xx/doc12054/05-
18-FHA_Letter.pdf
Federal Loan Guarantees for the Construction of Nuclear Power
Plants (August 2011), www.cbo.gov/ftpdocs/122xx/doc12238/08-03-
NuclearLoans.pdf
---------------------------------------------------------------------------
CBO estimates that if fair-value procedures were used to estimate
the cost of credit programs in 2014, the total deficit would be about
$50 billion greater than the deficit as measured using current
estimating procedures. That increase would be split between the
mandatory and discretionary portions of the budget:
On a FCRA basis, CBO estimates net subsidies for mandatory
credit programs would reduce the federal deficit by about $20 billion
in 2014. On a fair-value basis, the cost of those same programs would
be roughly $30 billion greater. Starting in 2015, the budget would
record increased budget authority and outlays for those programs;
however, because those programs are mandatory, fully funding them on a
fair-value basis under H.R. 1872 would require no further Congressional
action.\3\ The estimated net cost of legislative proposals for
establishing new mandatory credit programs or changes to existing
programs (such as student loans) would generally be larger using fair-
value procedures than they would be on a FCRA basis.
---------------------------------------------------------------------------
\3\Mandatory spending refers to budget authority that is provided
in laws other than appropriation acts and the outlays that result from
such budget authority.
---------------------------------------------------------------------------
Net receipts from discretionary credit programs reduced
the estimated cost of appropriations in 2014 by about $10 billion on a
FCRA basis. On a fair-value basis, CBO estimates that those same
programs would have required additional appropriations of about $20
billion. To account for the higher subsidy costs that would be incurred
by future appropriations when measured on a fair-value basis, H.R. 1872
would allow the caps on discretionary appropriations set forth in the
Budget Control Act of 2011 to be adjusted upward.
The Administration currently records transactions related to the
Treasury's conservatorship of Fannie Mae and Freddie Mac on a cash
basis in the federal budget. In contrast, CBO projects the budgetary
impact of the two entities' operations in future years as if they were
being conducted by a federal agency because of the degree of management
and financial control that the government exercises over them.
Therefore, CBO estimates the net lifetime costs--that is, the subsidy
costs adjusted for market risk--of guarantees that will be issued by as
well as loans that will be held by the entities and counts those costs
as federal outlays in the year of issuance. CBO estimates that the net
impact of the activities of those entities will cost an average of
about $2 billion per year on a fair-value basis over the next 10 years.
PAY-AS-YOU-GO CONSIDERATIONSNONE.
intergovernmental and private-sector impact
H.R. 1872 contains no intergovernmental or private-sector mandates
as defined in UMRA and would impose no costs on state, local, or tribal
governments.
ESTIMATE PREPARED BY
Federal Costs: Chad Chirico.
Impact on State, Local, and Tribal Governments: Melissa Merrell.
Impact on the Private Sector: Paige Piper/Bach.
estimate approved by
Peter H. Fontaine, Assistant Director for Budget Analysis.
Performance Goals and Objectives
With respect to the requirement of clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, the
performance goals and objectives of this legislation are to
increase the transparency of Federal budgeting by bringing off-
budget entities on-budget, reform the accounting methodology
used for Federal credit programs to reflect best practices from
the private sector, and require agencies to promptly make
public the budget justification materials they submit to
Congress in support of their requests for public funds.
Constitutional Authority Statement
Pursuant to clause 7 of rule XII of the Rules of the House
of Representatives, the committee finds the constitutional
authority for this legislation in Article I, section 9, clause
7.
Committee Cost Estimate
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the committee report incorporates the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to sections 402 and 423 of the
Congressional Budget Act of 1974.
Advisory Committee Statement
No advisory committee within the meaning of section 5(b) of
the Federal Advisory Committee Act was created by this
legislation.
Applicability to the Legislative Branch
The committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act (P.L. 104-1).
Federal Mandates Statement
The committee adopts the estimate of Federal mandates
prepared by the Director of the Congressional Budget Office
pursuant to section 423 of the Unfunded Mandates Reform Act
(P.L. 104-4).
Advisory on Earmarks
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 1872 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as defined in clause 9(e), 9(f), or 9(g) of rule XXI
of the Rules of the House of Representatives.
Duplication of Federal Programs
No provision of H.R. 1872, the Budget and Accounting
Transparency Act of 2014, establishes or reauthorizes a program
of the Federal Government known to be duplicative of another
Federal program, a program that was included in any report from
the Government Accountability Office to Congress pursuant to
section 21 of Public Law 111-139, or a program related to a
program identified in the most recent Catalog of Federal
Domestic Assistance.
Disclosure of Directed Rule Makings
The Committee estimates that H.R. 1872, the Budget and
Accounting Transparency Act of 2014, does not require any
directed rule makings.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
CONGRESSIONAL BUDGET AND IMPOUNDMENT CONTROL ACT OF 1974
short titles; table of contents
Section 1. (a) * * *
(b) Table of Contents.--
Sec. 1. Short titles; table of contents.
* * * * * * *
[TITLE V--CREDIT REFORM
[Sec. 500. Short title.
[Sec. 501. Purposes.
[Sec. 502. Definitions.
[Sec. 503. OMB and CBO analysis, coordination, and review.
[Sec. 504. Budgetary treatment.
[Sec. 505. Authorizations.
[Sec. 506. Treatment of deposit insurance and agencies and other
insurance programs.
[Sec. 507. Effect on other laws.]
Title V--FAIR VALUE
Sec. 500. Short title.
Sec. 501. Purposes.
Sec. 502. Definitions.
Sec. 503. OMB and CBO analysis, coordination, and review.
Sec. 504. Budgetary treatment.
Sec. 505. Authorizations.
Sec. 506. Treatment of deposit insurance and agencies and other
insurance programs.
Sec. 507. Effect on other laws.
* * * * * * *
[TITLE V--CREDIT REFORM
[SEC. 500. SHORT TITLE.
[This title may be cited as the ``Federal Credit Reform Act
of 1990''.
[SEC. 501. PURPOSES.
[The purposes of this title are to--
[(1) measure more accurately the costs of Federal
credit programs;
[(2) place the cost of credit programs on a
budgetary basis equivalent to other Federal spending;
[(3) encourage the delivery of benefits in the form
most appropriate to the needs of beneficiaries; and
[(4) improve the allocation of resources among
credit programs and between credit and other spending
programs.
[SEC. 502. DEFINITIONS.
[For purposes of this title--
[(1) The term ``direct loan'' means a disbursement
of funds by the Government to a non-Federal borrower
under a contract that requires the repayment of such
funds with or without interest. The term includes the
purchase of, or participation in, a loan made by
another lender and financing arrangements that defer
payment for more than 90 days, including the sale of a
government asset on credit terms. The term does not
include the acquisition of a federally guaranteed loan
in satisfaction of default claims or the price support
loans of the Commodity Credit Corporation.
[(2) The term ``direct loan obligation'' means a
binding agreement by a Federal agency to make a direct
loan when specified conditions are fulfilled by the
borrower.
[(3) The term ``loan guarantee'' means any
guarantee, insurance, or other pledge with respect to
the payment of all or a part of the principal or
interest on any debt obligation of a non-Federal
borrower to a non-Federal lender, but does not include
the insurance of deposits, shares, or other
withdrawable accounts in financial institutions.
[(4) The term ``loan guarantee commitment'' means a
binding agreement by a Federal agency to make a loan
guarantee when specified conditions are fulfilled by
the borrower, the lender, or any other party to the
guarantee agreement.
[(5)(A) The term ``cost'' means the estimated long-
term cost to the Government of a direct loan or loan
guarantee or modification thereof, calculated on a net
present value basis, excluding administrative costs and
any incidental effects on governmental receipts or
outlays.
[(B) The cost of a direct loan shall be the net
present value, at the time when the direct loan is
disbursed, of the following estimated cash flows:
[(i) loan disbursements;
[(ii) repayments of principal; and
[(iii) payments of interest and other
payments by or to the Government over the life
of the loan after adjusting for estimated
defaults, prepayments, fees, penalties, and
other recoveries;
including the effects of changes in loan terms
resulting from the exercise by the borrower of an
option included in the loan contract.
[(C) The cost of a loan guarantee shall be the net
present value, at the time when the guaranteed loan is
disbursed, of the following estimated cash flows:
[(i) payments by the Government to cover
defaults and delinquencies, interest subsidies,
or other payments; and
[(ii) payments to the Government including
origination and other fees, penalties and
recoveries;
including the effects of changes in loan terms
resulting from the exercise by the guaranteed lender of
an option included in the loan guarantee contract, or
by the borrower of an option included in the guaranteed
loan contract.
[(D) The cost of a modification is the difference
between the current estimate of the net present value
of the remaining cash flows under the terms of a direct
loan or loan guarantee contract, and the current
estimate of the net present value of the remaining cash
flows under the terms of the contract, as modified.
[(E) In estimating net present values, the discount
rate shall be the average interest rate on marketable
Treasury securities of similar maturity to the cash
flows of the direct loan or loan guarantee for which
the estimate is being made.
[(F) When funds are obligated for a direct loan or
loan guarantee, the estimated cost shall be based on
the current assumptions, adjusted to incorporate the
terms of the loan contract, for the fiscal year in
which the funds are obligated.
[(6) The term ``credit program account'' means the
budget account into which an appropriation to cover the
cost of a direct loan or loan guarantee program is made
and from which such cost is disbursed to the financing
account.
[(7) The term ``financing account'' means the non-
budget account or accounts associated with each credit
program account which holds balances, receives the cost
payment from the credit program account, and also
includes all other cash flows to and from the
Government resulting from direct loan obligations or
loan guarantee commitments made on or after October 1,
1991.
[(8) The term ``liquidating account'' means the
budget account that includes all cash flows to and from
the Government resulting from direct loan obligations
or loan guarantee commitments made prior to October 1,
1991. These accounts shall be shown in the budget on a
cash basis.
[(9) The term ``modification'' means any Government
action that alters the estimated cost of an outstanding
direct loan (or direct loan obligation) or an
outstanding loan guarantee (or loan guarantee
commitment) from the current estimate of cash flows.
This includes the sale of loan assets, with or without
recourse, and the purchase of guaranteed loans. This
also includes any action resulting from new
legislation, or from the exercise of administrative
discretion under existing law, that directly or
indirectly alters the estimated cost of outstanding
direct loans (or direct loan obligations) or loan
guarantees (or loan guarantee commitments) such as a
change in collection procedures.
[(10) The term ``current'' has the same meaning as
in section 250(c)(9) of the Balanced Budget and
Emergency Deficit Control Act of 1985.
[(11) The term ``Director'' means the Director of
the Office of Management and Budget.
[SEC. 503. OMB AND CBO ANALYSIS, COORDINATION, AND REVIEW.
[(a) In General.--For the executive branch, the Director
shall be responsible for coordinating the estimates required by
this title. The Director shall consult with the agencies that
administer direct loan or loan guarantee programs.
[(b) Delegation.--The Director may delegate to agencies
authority to make estimates of costs. The delegation of
authority shall be based upon written guidelines, regulations,
or criteria consistent with the definitions in this title.
[(c) Coordination With the Congressional Budget Office.--In
developing estimation guidelines, regulations, or criteria to
be used by Federal agencies, the Director shall consult with
the Director of the Congressional Budget Office.
[(d) Improving Cost Estimates.--The Director and the
Director of the Congressional Budget Office shall coordinate
the development of more accurate data on historical performance
of direct loan and loan guarantee programs. They shall annually
review the performance of outstanding direct loans and loan
guarantees to improve estimates of costs. The Office of
Management and Budget and the Congressional Budget Office shall
have access to all agency data that may facilitate the
development and improvement of estimates of costs.
[(e) Historical Credit Program Costs.--The Director shall
review, to the extent possible, historical data and develop the
best possible estimates of adjustments that would convert
aggregate historical budget data to credit reform accounting.
[(f) Administrative Costs.--The Director and the Director
of the Congressional Budget Office shall each analyze and
report to Congress on differences in long-term administrative
costs for credit programs versus grant programs by January 31,
1992. Their reports shall recommend to Congress any changes, if
necessary, in the treatment of administrative costs under
credit reform accounting.
[SEC. 504. BUDGETARY TREATMENT.
[(a) President's Budget.--Beginning with fiscal year 1992,
the President's budget shall reflect the costs of direct loan
and loan guarantee programs. The budget shall also include the
planned level of new direct loan obligations or loan guarantee
commitments associated with each appropriations request.
[(b) Appropriations Required.--Notwithstanding any other
provision of law, new direct loan obligations may be incurred
and new loan guarantee commitments may be made for fiscal year
1992 and thereafter only to the extent that--
[(1) new budget authority to cover their costs is
provided in advance in an appropriations Act;
[(2) a limitation on the use of funds otherwise
available for the cost of a direct loan or loan
guarantee program has been provided in advance in an
appropriations Act; or
[(3) authority is otherwise provided in
appropriation Acts.
[(c) Exemption for Mandatory Programs.--Subsections (b) and
(e) shall not apply to a direct loan or loan guarantee program
that--
[(1) constitutes an entitlement (such as the
guaranteed student loan program or the veterans' home
loan guaranty program); or
[(2) all existing credit programs of the Commodity
Credit Corporation on the date of enactment of this
title.
[(d) Budget Accounting.--
[(1) The authority to incur new direct loan
obligations, make new loan guarantee commitments, or
modify outstanding direct loans (or direct loan
obligations) or loan guarantees (or loan guarantee
commitments) shall constitute new budget authority in
an amount equal to the cost of the direct loan or loan
guarantee in the fiscal year in which definite
authority becomes available or indefinite authority is
used. Such budget authority shall constitute an
obligation of the credit program account to pay to the
financing account.
[(2) The outlays resulting from new budget
authority for the cost of direct loans or loan
guarantees described in paragraph (1) shall be paid
from the credit program account into the financing
account and recorded in the fiscal year in which the
direct loan or the guaranteed loan is disbursed or its
costs altered.
[(3) All collections and payments of the financing
accounts shall be a means of financing.
[(e) Modifications.--An outstanding direct loan (or direct
loan obligation) or loan guarantee (or loan guarantee
commitment) shall not be modified in a manner that increases
its costs unless budget authority for the additional cost has
been provided in advance in an appropriations Act.
[(f) Reestimates.--When the estimated cost for a group of
direct loans or loan guarantees for a given credit program made
in a single fiscal year is reestimated in a subsequent year,
the difference between the reestimated cost and the previous
cost estimate shall be displayed as a distinct and separately
identified subaccount in the credit program account as a change
in program costs and a change in net interest. There is hereby
provided permanent indefinite authority for these reestimates.
[(g) Administrative Expenses.--All funding for an agency's
administration of a direct loan or loan guarantee program shall
be displayed as distinct and separately identified subaccounts
within the same budget account as the program's cost.
[SEC. 505. AUTHORIZATIONS.
[(a) Authorization of Appropriations for Costs.--There are
authorized to be appropriated to each Federal agency authorized
to make direct loan obligations or loan guarantee commitments,
such sums as may be necessary to pay the cost associated with
such direct loan obligations or loan guarantee commitments.
[(b) Authorization for Financing Accounts.--In order to
implement the accounting required by this title, the President
is authorized to establish such non-budgetary accounts as may
be appropriate.
[(c) Treasury Transactions With the Financing Accounts.--
The Secretary of the Treasury shall borrow from, receive from,
lend to, or pay to the financing accounts such amounts as may
be appropriate. The Secretary of the Treasury may prescribe
forms and denominations, maturities, and terms and conditions
for the transactions described above, except that the rate of
interest charged by the Secretary on lending to financing
accounts (including amounts treated as lending to financing
accounts by the Federal Financing Bank (hereinafter in this
subsection referred to as the ``Bank'') pursuant to section
405(b)) and the rate of interest paid to financing accounts on
uninvested balances in financing accounts shall be the same as
the rate determined pursuant to section 502(5)(E). For
guaranteed loans financed by the Bank and treated as direct
loans by a Federal agency pursuant to section 405(b), any fee
or interest surcharge (the amount by which the interest rate
charged exceeds the rate determined pursuant to section
502(5)(E)) that the Bank charges to a private borrower pursuant
to section 6(c) of the Federal Financing Bank Act of 1973 shall
be considered a cash flow to the Government for the purposes of
determining the cost of the direct loan pursuant to section
502(5). All such amounts shall be credited to the appropriate
financing account. The Bank is authorized to require
reimbursement from a Federal agency to cover the administrative
expenses of the Bank that are attributable to the direct loans
financed for that agency. All such payments by an agency shall
be considered administrative expenses subject to section
504(g). This subsection shall apply to transactions related to
direct loan obligations or loan guarantee commitments made on
or after October 1, 1991. The authorities described above shall
not be construed to supersede or override the authority of the
head of a Federal agency to administer and operate a direct
loan or loan guarantee program. All of the transactions
provided in this subsection shall be subject to the provisions
of subchapter II of chapter 15 of title 31, United States Code.
Cash balances of the financing accounts in excess of current
requirements shall be maintained in a form of uninvested funds
and the Secretary of the Treasury shall pay interest on these
funds.
[(d) Authorization for Liquidating Accounts.--(1) Amounts
in liquidating accounts shall be available only for payments
resulting from direct loan obligations or loan guarantee
commitments made prior to October 1, 1991, for--
[(A) interest payments and principal repayments to
the Treasury or the Federal Financing Bank for amounts
borrowed;
[(B) disbursements of loans;
[(C) default and other guarantee claim payments;
[(D) interest supplement payments;
[(E) payments for the costs of foreclosing,
managing, and selling collateral that are capitalized
or routinely deducted from the proceeds of sales;
[(F) payments to financing accounts when required
for modifications;
[(G) administrative expenses, if--
[(i) amounts credited to the liquidating
account would have been available for
administrative expenses under a provision of
law in effect prior to October 1, 1991; and
[(ii) no direct loan obligation or loan
guarantee commitment has been made, or any
modification of a direct loan or loan guarantee
has been made, since September 30, 1991; or
[(H) such other payments as are necessary for the
liquidation of such direct loan obligations and loan
guarantee commitments.
[(2) Amounts credited to liquidating accounts in any year
shall be available only for payments required in that year. Any
unobligated balances in liquidating accounts at the end of a
fiscal year shall be transferred to miscellaneous receipts as
soon as practicable after the end of the fiscal year.
[(3) If funds in liquidating accounts are insufficient to
satisfy obligations and commitments of such accounts, there is
hereby provided permanent, indefinite authority to make any
payments required to be made on such obligations and
commitments.
[(e) Authorization of Appropriations for Implementation
Expenses.--There are authorized to be appropriated to existing
accounts such sums as may be necessary for salaries and
expenses to carry out the responsibilities under this title.
[(f) Reinsurance.--Nothing in this title shall be construed
as authorizing or requiring the purchase of insurance or
reinsurance on a direct loan or loan guarantee from private
insurers. If any such reinsurance for a direct loan or loan
guarantee is authorized, the cost of such insurance and any
recoveries to the Government shall be included in the
calculation of the cost.
[(g) Eligibility and Assistance.--Nothing in this title
shall be construed to change the authority or the
responsibility of a Federal agency to determine the terms and
conditions of eligibility for, or the amount of assistance
provided by a direct loan or a loan guarantee.
[SEC. 506. TREATMENT OF DEPOSIT INSURANCE AND AGENCIES AND OTHER
INSURANCE PROGRAMS.
[(a) In General.--This title shall not apply to the credit
or insurance activities of the Federal Deposit Insurance
Corporation, National Credit Union Administration, Resolution
Trust Corporation, Pension Benefit Guaranty Corporation,
National Flood Insurance, National Insurance Development Fund,
Crop Insurance, or Tennessee Valley Authority.
[(b) Study.--The Director and the Director of the
Congressional Budget Office shall each study whether the
accounting for Federal deposit insurance programs should be on
a cash basis on the same basis as loan guarantees, or on a
different basis. Each Director shall report findings and
recommendations to the President and the Congress on or before
May 31, 1991.
[(c) Access to Data.--For the purposes of subsection (b),
the Office of Management and Budget and the Congressional
Budget Office shall have access to all agency data that may
facilitate these studies.
[SEC. 507. EFFECT ON OTHER LAWS.
[(a) Effect on Other Laws.--This title shall supersede,
modify, or repeal any provision of law enacted prior to the
date of enactment of this title to the extent such provision is
inconsistent with this title. Nothing in this title shall be
construed to establish a credit limitation on any Federal loan
or loan guarantee program.
[(b) Crediting of Collections.--Collections resulting from
direct loans obligated or loan guarantees committed prior to
October 1, 1991, shall be credited to the liquidating accounts
of Federal agencies. Amounts so credited shall be available, to
the same extent that they were available prior to the date of
enactment of this title, to liquidate obligations arising from
such direct loans obligated or loan guarantees committed prior
to October 1, 1991, including repayment of any obligations held
by the Secretary of the Treasury or the Federal Financing Bank.
The unobligated balances of such accounts that are in excess of
current needs shall be transferred to the general fund of the
Treasury. Such transfers shall be made from time to time but,
at least once each year.]
TITLE V--FAIR VALUE
SEC. 500. SHORT TITLE.
This title may be cited as the ``Fair Value Accounting Act
of 2014''.
SEC. 501. PURPOSES.
The purposes of this title are to--
(1) measure more accurately the costs of Federal
credit programs by accounting for them on a fair value
basis;
(2) place the cost of credit programs on a
budgetary basis equivalent to other Federal spending;
(3) encourage the delivery of benefits in the form
most appropriate to the needs of beneficiaries; and
(4) improve the allocation of resources among
Federal programs.
SEC. 502. DEFINITIONS.
For purposes of this title:
(1) The term ``direct loan'' means a disbursement
of funds by the Government to a non-Federal borrower
under a contract that requires the repayment of such
funds with or without interest. The term includes the
purchase of, or participation in, a loan made by
another lender and financing arrangements that defer
payment for more than 90 days, including the sale of a
Government asset on credit terms. The term does not
include the acquisition of a federally guaranteed loan
in satisfaction of default claims or the price support
loans of the Commodity Credit Corporation.
(2) The term ``direct loan obligation'' means a
binding agreement by a Federal agency to make a direct
loan when specified conditions are fulfilled by the
borrower.
(3) The term ``loan guarantee'' means any
guarantee, insurance, or other pledge with respect to
the payment of all or a part of the principal or
interest on any debt obligation of a non-Federal
borrower to a non-Federal lender, but does not include
the insurance of deposits, shares, or other
withdrawable accounts in financial institutions.
(4) The term ``loan guarantee commitment'' means a
binding agreement by a Federal agency to make a loan
guarantee when specified conditions are fulfilled by
the borrower, the lender, or any other party to the
guarantee agreement.
(5)(A) The term ``cost'' means the sum of the
Treasury discounting component and the risk component
of a direct loan or loan guarantee, or a modification
thereof.
(B) The Treasury discounting component shall be the
estimated long-term cost to the Government of a direct
loan or loan guarantee, or modification thereof,
calculated on a net present value basis, excluding
administrative costs and any incidental effects on
governmental receipts or outlays.
(C) The risk component shall be an amount equal to
the difference between--
(i) the estimated long-term cost to the
Government of a direct loan or loan guarantee,
or modification thereof, estimated on a fair
value basis, applying the guidelines set forth
by the Financial Accounting Standards Board in
Financial Accounting Standards #157, or a
successor thereto, excluding administrative
costs and any incidental effects on
governmental receipts or outlays; and
(ii) the Treasury discounting component of
such direct loan or loan guarantee, or
modification thereof.
(D) The Treasury discounting component of a direct
loan shall be the net present value, at the time when
the direct loan is disbursed, of the following
estimated cash flows:
(i) Loan disbursements.
(ii) Repayments of principal.
(iii) Essential preservation expenses,
payments of interest and other payments by or
to the Government over the life of the loan
after adjusting for estimated defaults,
prepayments, fees, penalties, and other
recoveries, including the effects of changes in
loan terms resulting from the exercise by the
borrower of an option included in the loan
contract.
(E) The Treasury discounting component of a loan
guarantee shall be the net present value, at the time
when the guaranteed loan is disbursed, of the following
estimated cash flows:
(i) Payments by the Government to cover
defaults and delinquencies, interest subsidies,
essential preservation expenses, or other
payments.
(ii) Payments to the Government including
origination and other fees, penalties, and
recoveries, including the effects of changes in
loan terms resulting from the exercise by the
guaranteed lender of an option included in the
loan guarantee contract, or by the borrower of
an option included in the guaranteed loan
contract.
(F) The cost of a modification is the sum of--
(i) the difference between the current
estimate of the Treasury discounting component
of the remaining cash flows under the terms of
a direct loan or loan guarantee and the current
estimate of the Treasury discounting component
of the remaining cash flows under the terms of
the contract, as modified; and
(ii) the difference between the current
estimate of the risk component of the remaining
cash flows under the terms of a direct loan or
loan guarantee and the current estimate of the
risk component of the remaining cash flows
under the terms of the contract as modified.
(G) In estimating Treasury discounting components,
the discount rate shall be the average interest rate on
marketable Treasury securities of similar duration to
the cash flows of the direct loan or loan guarantee for
which the estimate is being made.
(H) When funds are obligated for a direct loan or
loan guarantee, the estimated cost shall be based on
the current assumptions, adjusted to incorporate the
terms of the loan contract, for the fiscal year in
which the funds are obligated.
(6) The term ``program account'' means the budget
account into which an appropriation to cover the cost
of a direct loan or loan guarantee program is made and
from which such cost is disbursed to the financing
account.
(7) The term ``financing account'' means the
nonbudget account or accounts associated with each
program account which holds balances, receives the cost
payment from the program account, and also includes all
other cash flows to and from the Government resulting
from direct loan obligations or loan guarantee
commitments made on or after October 1, 1991.
(8) The term ``liquidating account'' means the
budget account that includes all cash flows to and from
the Government resulting from direct loan obligations
or loan guarantee commitments made prior to October 1,
1991. These accounts shall be shown in the budget on a
cash basis.
(9) The term ``modification'' means any Government
action that alters the estimated cost of an outstanding
direct loan (or direct loan obligation) or an
outstanding loan guarantee (or loan guarantee
commitment) from the current estimate of cash flows.
This includes the sale of loan assets, with or without
recourse, and the purchase of guaranteed loans (or
direct loan obligations) or loan guarantees (or loan
guarantee commitments) such as a change in collection
procedures.
(10) The term ``current'' has the same meaning as
in section 250(c)(9) of the Balanced Budget and
Emergency Deficit Control Act of 1985.
(11) The term ``Director'' means the Director of
the Office of Management and Budget.
(12) The term ``administrative costs'' means costs
related to program management activities, but does not
include essential preservation expenses.
(13) The term ``essential preservation expenses''
means servicing and other costs that are essential to
preserve the value of loan assets or collateral.
SEC. 503. OMB AND CBO ANALYSIS, COORDINATION, AND REVIEW.
(a) In General.--For the executive branch, the Director
shall be responsible for coordinating the estimates required by
this title. The Director shall consult with the agencies that
administer direct loan or loan guarantee programs.
(b) Delegation.--The Director may delegate to agencies
authority to make estimates of costs. The delegation of
authority shall be based upon written guidelines, regulations,
or criteria consistent with the definitions in this title.
(c) Coordination with the Congressional Budget Office.--In
developing estimation guidelines, regulations, or criteria to
be used by Federal agencies, the Director shall consult with
the Director of the Congressional Budget Office.
(d) Improving Cost Estimates.--The Director and the
Director of the Congressional Budget Office shall coordinate
the development of more accurate data on historical performance
and prospective risk of direct loan and loan guarantee
programs. They shall annually review the performance of
outstanding direct loans and loan guarantees to improve
estimates of costs. The Office of Management and Budget and the
Congressional Budget Office shall have access to all agency
data that may facilitate the development and improvement of
estimates of costs.
(e) Historical Credit Programs Costs.--The Director shall
review, to the extent possible, historical data and develop the
best possible estimates of adjustments that would convert
aggregate historical budget data to credit reform accounting.
SEC. 504. BUDGETARY TREATMENT.
(a) President's Budget.--Beginning with fiscal year 2017,
the President's budget shall reflect the costs of direct loan
and loan guarantee programs. The budget shall also include the
planned level of new direct loan obligations or loan guarantee
commitments associated with each appropriations request. For
each fiscal year within the five-fiscal year period beginning
with fiscal year 2017, such budget shall include, on an agency-
by-agency basis, subsidy estimates and costs of direct loan and
loan guarantee programs with and without the risk component.
(b) Appropriations Required.--Notwithstanding any other
provision of law, new direct loan obligations may be incurred
and new loan guarantee commitments may be made for fiscal year
2017 and thereafter only to the extent that--
(1) new budget authority to cover their costs is
provided in advance in an appropriation Act;
(2) a limitation on the use of funds otherwise
available for the cost of a direct loan or loan
guarantee program has been provided in advance in an
appropriation Act; or
(3) authority is otherwise provided in
appropriation Acts.
(c) Exemption for Direct Spending Programs.--Subsections
(b) and (e) shall not apply to--
(1) any direct loan or loan guarantee program that
constitutes an entitlement (such as the guaranteed
student loan program or the veteran's home loan
guaranty program);
(2) the credit programs of the Commodity Credit
Corporation existing on the date of enactment of this
title; or
(3) any direct loan (or direct loan obligation) or
loan guarantee (or loan guarantee commitment) made by
the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation.
(d) Budget Accounting.--
(1) The authority to incur new direct loan
obligations, make new loan guarantee commitments, or
modify outstanding direct loans (or direct loan
obligations) or loan guarantees (or loan guarantee
commitments) shall constitute new budget authority in
an amount equal to the cost of the direct loan or loan
guarantee in the fiscal year in which definite
authority becomes available or indefinite authority is
used. Such budget authority shall constitute an
obligation of the program account to pay to the
financing account.
(2) The outlays resulting from new budget authority
for the cost of direct loans or loan guarantees
described in paragraph (1) shall be paid from the
program account into the financing account and recorded
in the fiscal year in which the direct loan or the
guaranteed loan is disbursed or its costs altered.
(3) All collections and payments of the financing
accounts shall be a means of financing.
(e) Modifications.--An outstanding direct loan (or direct
loan obligation) or loan guarantee (or loan guarantee
commitment) shall not be modified in a manner that increases
its costs unless budget authority for the additional cost has
been provided in advance in an appropriation Act.
(f) Reestimates.--When the estimated cost for a group of
direct loans or loan guarantees for a given program made in a
single fiscal year is re-estimated in a subsequent year, the
difference between the reestimated cost and the previous cost
estimate shall be displayed as a distinct and separately
identified subaccount in the program account as a change in
program costs and a change in net interest. There is hereby
provided permanent indefinite authority for these re-estimates.
(g) Administrative Expenses.--All funding for an agency's
administrative costs associated with a direct loan or loan
guarantee program shall be displayed as distinct and separately
identified subaccounts within the same budget account as the
program's cost.
SEC. 505. AUTHORIZATIONS.
(a) Authorization for Financing Accounts.--In order to
implement the accounting required by this title, the President
is authorized to establish such non-budgetary accounts as may
be appropriate.
(b) Treasury Transactions with the Financing Accounts.--
(1) In general.--The Secretary of the Treasury
shall borrow from, receive from, lend to, or pay to the
financing accounts such amounts as may be appropriate.
The Secretary of the Treasury may prescribe forms and
denominations, maturities, and terms and conditions for
the transactions described in the preceding sentence,
except that the rate of interest charged by the
Secretary on lending to financing accounts (including
amounts treated as lending to financing accounts by the
Federal Financing Bank (hereinafter in this subsection
referred to as the ``Bank'') pursuant to section
405(b)) and the rate of interest paid to financing
accounts on uninvested balances in financing accounts
shall be the same as the rate determined pursuant to
section 502(5)(G).
(2) Loans.--For guaranteed loans financed by the
Bank and treated as direct loans by a Federal agency
pursuant to section 406(b)(1), any fee or interest
surcharge (the amount by which the interest rate
charged exceeds the rate determined pursuant to section
502(5)(G) that the Bank charges to a private borrower
pursuant to section 6(c) of the Federal Financing Bank
Act of 1973 shall be considered a cash flow to the
Government for the purposes of determining the cost of
the direct loan pursuant to section 502(5). All such
amounts shall be credited to the appropriate financing
account.
(3) Reimbursement.--The Bank is authorized to
require reimbursement from a Federal agency to cover
the administrative expenses of the Bank that are
attributable to the direct loans financed for that
agency. All such payments by an agency shall be
considered administrative expenses subject to section
504(g). This subsection shall apply to transactions
related to direct loan obligations or loan guarantee
commitments made on or after October 1, 1991.
(4) Authority.--The authorities provided in this
subsection shall not be construed to supersede or
override the authority of the head of a Federal agency
to administer and operate a direct loan or loan
guarantee program.
(5) Title 31.--All of the transactions provided in
the subsection shall be subject to the provisions of
subchapter II of chapter 15 of title 31, United States
Code.
(6) Treatment of cash balances.--Cash balances of
the financing accounts in excess of current
requirements shall be maintained in a form of
uninvested funds and the Secretary of the Treasury
shall pay interest on these funds. The Secretary of the
Treasury shall charge (or pay if the amount is
negative) financing accounts an amount equal to the
risk component for a direct loan or loan guarantee, or
modification thereof. Such amount received by the
Secretary of the Treasury shall be a means of financing
and shall not be considered a cash flow of the
Government for the purposes of section 502(5).
(c) Authorization for Liquidating Accounts.--(1) Amounts in
liquidating accounts shall be available only for payments
resulting from direct loan obligations or loan guarantee
commitments made prior to October 1, 1991, for--
(A) interest payments and principal repayments to
the Treasury or the Federal Financing Bank for amounts
borrowed;
(B) disbursements of loans;
(C) default and other guarantee claim payments;
(D) interest supplement payments;
(E) payments for the costs of foreclosing,
managing, and selling collateral that are capitalized
or routinely deducted from the proceeds of sales;
(F) payments to financing accounts when required
for modifications;
(G) administrative costs and essential preservation
expenses, if--
(i) amounts credited to the liquidating
account would have been available for
administrative costs and essential preservation
expenses under a provision of law in effect
prior to October 1, 1991; and
(ii) no direct loan obligation or loan
guarantee commitment has been made, or any
modification of a direct loan or loan guarantee
has been made, since September 30, 1991; or
(H) such other payments as are necessary for the
liquidation of such direct loan obligations and loan
guarantee commitments.
(2) Amounts credited to liquidating accounts in any year
shall be available only for payments required in that year. Any
unobligated balances in liquidating accounts at the end of a
fiscal year shall be transferred to miscellaneous receipts as
soon as practicable after the end of the fiscal year.
(3) If funds in liquidating accounts are insufficient to
satisfy obligations and commitments of such accounts, there is
hereby provided permanent, indefinite authority to make any
payments required to be made on such obligations and
commitments.
(d) Reinsurance.--Nothing in this title shall be construed
as authorizing or requiring the purchase of insurance or
reinsurance on a direct loan or loan guarantee from private
insurers. If any such reinsurance for a direct loan or loan
guarantee is authorized, the cost of such insurance and any
recoveries to the Government shall be included in the
calculation of the cost.
(e) Eligibility and Assistance.--Nothing in this title
shall be construed to change the authority or the
responsibility of a Federal agency to determine the terms and
conditions of eligibility for, or the amount of assistance
provided by a direct loan or a loan guarantee.
SEC. 506. TREATMENT OF DEPOSIT INSURANCE AND AGENCIES AND OTHER
INSURANCE PROGRAMS.
This title shall not apply to the credit or insurance
activities of the Federal Deposit Insurance Corporation,
National Credit Union Administration, Resolution Trust
Corporation, Pension Benefit Guaranty Corporation, National
Flood Insurance, National Insurance Development Fund, Crop
Insurance, or Tennessee Valley Authority.
SEC. 507. EFFECT ON OTHER LAWS.
(a) Effect on other Laws.--This title shall supersede,
modify, or repeal any provision of law enacted prior to the
date of enactment of this title to the extent such provision is
inconsistent with this title. Nothing in this title shall be
construed to establish a credit limitation on any Federal loan
or loan guarantee program.
(b) Crediting of Collections.--Collections resulting from
direct loans obligated or loan guarantees committed prior to
October 1, 1991, shall be credited to the liquidating accounts
of Federal agencies. Amounts so credited shall be available, to
the same extent that they were available prior to the date of
enactment of this title, to liquidate obligations arising from
such direct loans obligated or loan guarantees committed prior
to October 1, 1991, including repayment of any obligations held
by the Secretary of the Treasury or the Federal Financing Bank.
The unobligated balances of such accounts that are in excess of
current needs shall be transferred to the general fund of the
Treasury. Such transfers shall be made from time to time but,
at least once each year.
* * * * * * *
----------
BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL ACT OF 1985
PART C--EMERGENCY POWERS TO ELIMINATE DEFICITS IN EXCESS OF MAXIMUM
DEFICIT AMOUNT
* * * * * * *
SEC. 251. ENFORCING DISCRETIONARY SPENDING LIMITS.
(a) * * *
(b) Adjustments to Discretionary Spending Limits.--
(1) Concepts and definitions.--When the President
submits the budget under section 1105 of title 31,
United States Code, OMB shall calculate and the budget
shall include adjustments to discretionary spending
limits (and those limits as cumulatively adjusted) for
the budget year and each outyear to reflect changes in
concepts and definitions. Such changes shall equal the
baseline levels of new budget authority and outlays
using up-to-date concepts and definitions, minus those
levels using the concepts and definitions in effect
before such changes. Such changes may only be made
after consultation with the Committees on
Appropriations and the Budget of the House of
Representatives and the Senate, and that consultation
shall include written communication to such committees
that affords such committees the opportunity to comment
before official action is taken with respect to such
changes. A change in discretionary spending solely as a
result of the amendment to title V of the Congressional
Budget Act of 1974 made by the Budget and Accounting
Transparency Act of 2014 shall be treated as a change
of concept under this paragraph.
* * * * * * *
----------
TITLE 31, UNITED STATES CODE
* * * * * * *
SUBTITLE II--THE BUDGET PROCESS
* * * * * * *
CHAPTER 11--THE BUDGET AND FISCAL, BUDGET, AND PROGRAM INFORMATION
* * * * * * *
Sec. 1108. Preparation and submission of appropriations requests to the
President
(a) * * *
* * * * * * *
(h)(1) Whenever any agency prepares and submits written
budget justification materials for any committee of the House
of Representatives or the Senate, such agency shall post such
budget justification on the same day of such submission on the
``open'' page of the public website of the agency, and the
Office of Management and Budget shall post such budget
justification in a centralized location on its website, in the
format developed under paragraph (2). Each agency shall include
with its written budget justification the process and
methodology the agency is using to comply with the Fair Value
Accounting Act of 2014.
(2) The Office of Management and Budget, in consultation
with the Congressional Budget Office and the Government
Accountability Office, shall develop and notify each agency of
the format in which to post a budget justification under
paragraph (1). Such format shall be designed to ensure that
posted budget justifications for all agencies--
(A) are searchable, sortable, and downloadable by
the public;
(B) are consistent with generally accepted
standards and practices for machine-discoverability;
(C) are organized uniformly, in a logical manner
that makes clear the contents of a budget justification
and relationships between data elements within the
budget justification and among similar documents; and
(D) use uniform identifiers, including for
agencies, bureaus, programs, and projects.
(i)(1) Not later than the day that the Office of Management
and Budget issues guidelines, regulations, or criteria to
agencies on how to calculate the risk component under the Fair
Value Accounting Act of 2014, it shall submit a written report
to the Committees on the Budget of the House of Representatives
and the Senate containing all such guidelines, regulations, or
criteria.
(2) For fiscal year 2017 and each of the next four fiscal
years thereafter, the Comptroller General shall submit an
annual report to the Committees on the Budget of the House of
Representatives and the Senate reviewing and evaluating the
progress of agencies in the implementation of the Fair Value
Accounting Act of 2014.
(3) Such guidelines, regulations, or criteria shall be
deemed to be a rule for purposes of section 553 of title 5 and
shall be issued after notice and opportunity for public comment
in accordance with the procedures under such section.
* * * * * * *
Views of Committee Members
Clause 2(l) of rule XI of the Rules of the House of
Representatives requires each committee to provide two days to
Members of the committee to file Minority, additional,
supplemental, or dissenting views and to include such views in
the report on legislation considered by the committee. The
following views were submitted:
Minority Views on H.R. 1872, the Budget and
Accounting Transparency Act of 2014
One of the real challenges facing our nation is the ability
to approve a federal budget on time. Our problem, however, is
not with the budget process--we have enough tools in our tool
box to deal with our budget issues. Everybody who serves on
this Committee and in this Congress knows that the fundamental
problem as it relates to our budget has a lot less to do with
process and a lot more to do with politics. Our problem stems
from overarching politics and an unwillingness of many Members
of Congress to compromise.
While we commend Mr. Garrett for the effort he has put into
this legislation, we do not think that this bill is ready for
prime time. The Budget Committee has not held a single hearing
on this complex bill during this Congress even though there are
many new Members on this Committee. The last time we did hold a
hearing--more than two years ago--the testimony focused only on
so-called ``fair value'' estimating in respect to Fannie Mae,
Freddie Mac, and the Federal Housing Administration. The
hearing did not address the impact of this legislation on all
the other loan programs. This bill goes way beyond these
entities to apply this different type of valuation to all
government loan and credit programs.
The government currently estimates the cost of providing
credit assistance through loans and loan guarantees based on
the present value of future cash flows, discounted using the
rates on U.S. Treasury notes. This is the form of accounting
mandated by the Federal Credit Reform Act of 1990. Such credit
reform estimates do take into account likely losses in loan
accounts--they do budget for the risk of default.
The bill mandates a switch to fair value estimates of cost
for all government loan and loan guarantee programs. Fair value
estimates would apply an additional cost of risk to all loans,
under the assumption that all U.S. government loan programs
should apply the same risk factors that a private business
might apply to making a loan, even though the circumstances
faced by the government are very different.
However, there is an ongoing debate on whether fair value
estimates fairly reflect the federal government's costs and
risks. The Office of Management and Budget (OMB) opposes this
switch to fair value estimates. The OMB Analytical Perspectives
from FY 2014 state that ``the budget is more informative when
it shows the direct cost to the Government in an accurate and
transparent manner, as opposed to the economic cost, or other
definitions of cost that depend on unobservable values. It is
conceptually difficult to identify the uncertainty premium
relevant to taxpayers, which differs in many cases from the
uncertainty premium for private investors.''
The non-partisan Center on Budget and Policy Priorities
also opposes mandating fair value estimates. It pointed out in
a paper in 2013 that this legislation would ``add an extra
amount to the budgetary cost that [OMB and the Congressional
Budget Office] show for loan and guarantee programs, based on
the additional amount that private lenders would charge
borrowers if they, rather than the federal government, issued
the loans and guarantees. By overstating the federal costs of
federal credit programs, the proposal would overstate federal
deficits and force budget documents to offset these phantom
costs with phantom offsets to avoid overstating the debt as
well.''
The outlays that would appear in the budget as a result of
a shift to fair value estimates would be greater than the
outlays that would occur in reality. Thus, using fair value
estimates overstates the real costs of federal credit
assistance programs.
If the Budget Committee is serious about further exploring
the merits of switching to fair value estimates, we should hold
a hearing that includes a discussion of how this would impact
federal credit programs across the board. This issue is much
broader than simply Fannie Mae and Freddie Mac. For all these
reasons, Budget Committee Democrats voted in opposition to this
legislation.
John A. Yarmuth,
Gwen Moore,
Kathy Castor,
Tony Cardenas,
Jared Huffman,
Jim McDermott,
Earl Blumenauer,
Barbara Lee,
Michelle Lujan Grisham,
Mark Pocan,
Tim Ryan,
Hakeem S. Jeffries,
Bill Pascrell, Jr.,
Chris Van Hollen,
Members of Congress.
[Additional submissions for the record from Mr. Van Hollen
follow:]
Center on Budget and Policy Priorities,
820 First Street NE, Suite 510,
Washington, DC 20002, revised June 18, 2013.
House Bill Would Artificially Inflate Cost Of Federal Credit Programs
By Richard Kogan, Paul Van de Water, and James Horney
The House Budget Committee may consider legislation in the near
future that would change the federal accounting of direct loans and
loan guarantees in ways that would overstate the federal costs of those
programs. As a result, the legislation also would overstate total
federal spending and deficits.
The Federal Credit Reform Act of 1990 changed the budgetary
accounting of federal credit programs. Previously, the budget displayed
the costs of credit programs in the years those costs actually
occurred; that is, it showed federal expenditures from loans or
guarantees in any particular year, offset by loan repayments in that
year. Since the 1990 law, the budget displays the same total net costs
of loans or guarantees but shows them up front--when the government
issues the loans and loan guarantees--rather than year by year over the
course of their lifetimes.
The legislation--H.R. 1872,\1\ introduced by Rep. Scott Garrett (R-
NJ) and co-sponsored by House Budget Committee chair Paul Ryan (R-WI)--
would significantly change the rules in place since the 1990 law. It
would require the Congressional Budget Office (CBO) and the Office of
Management and Budget (OMB) to add an extra amount to the budgetary
cost that they show for loan and guarantee programs, based on the
additional amount that private lenders would charge borrowers if they,
rather than the federal government, issued the loans and loan
guarantees. By overstating the federal costs of credit programs, the
proposal would overstate federal deficits and force budget documents to
offset these phantom costs with phantom offsets to avoid overstating
the debt as well.
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\1\H.R. 1872 is identical to H.R. 3581 from the 112th Congress,
approved by the House Budget Committee on January 24, 2012 and by the
House of Representatives on February 7, 2012. It is very similar to
section 4 of S. 1651, 112th Congress, introduced in October 2011 by
Sen. Jeff Session (R-AL).
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This proposal is not based on any claim that current estimates of
the federal outlays and receipts associated with federal credit
programs understate the actual federal costs of these programs. Quite
the contrary; by requiring CBO and OMB to add an extra amount to their
estimated cost of federal credit programs, the legislation would
artificially inflate the programs' estimated budgetary cost.
Consequently, the budget treatment of federal credit programs under
H.R. 1872 would conflict with the basic purposes of budgeting and with
the way that budgets record all other activities.
CREDIT ACCOUNTING UNDER CURRENT LAW
The federal budget generally records revenues and spending on a
cash basis. That is, the cost recorded for a program in a fiscal year
is the actual cash spent on that program in that year, and the budget
deficit for a year is the difference between total cash expenditures
for all programs in that year and the total amount of cash collected as
revenues in that year.\2\ By 1990, however, there was widespread
agreement that showing the effect of government credit programs on a
cash basis did not facilitate a meaningful comparison between the costs
of credit programs and other programs, or between the cost of direct
loans and loan guarantees.
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\2\Aside from credit programs (as explained in this analysis),
there are only a few instances--such as the recording of some Treasury
interest costs when they accrue rather than when they are paid--in
which the budget records spending on other than a pure cash basis. And
in those cases, the only change is to timing, not total amount.
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The problem was not that incorrect amounts of cash disbursements
and receipts were being recorded for credit programs. The problem,
rather, was that for those programs, showing cash transactions when
they occurred did not provide policymakers considering whether to cut,
maintain, or increase those programs with meaningful information about
the cost of their decisions over time.
LOANS AND LOAN GUARANTEES FORMERLY RECORDED ON CASH BASIS
Before the Credit Reform Act, a $100 direct loan was shown in the
budget as costing $100 in the year the loan was made. The cash the
government subsequently received when the borrower repaid principal and
interest was recorded in subsequent years, as those payments were
received. As a result, a $100 loan in the coming fiscal year appeared
to have the same budgetary effect as a $100 grant in the same year,
even though the loan had a significantly smaller true impact on the
budget than the grant, since all or a substantial portion of the loan
would be repaid in subsequent years.
In contrast, a federal guarantee of a $100 loan appeared under the
pre-1990 budget rules to produce income for the government in the year
that the guarantee was issued. Federal loan guarantee programs
generally require borrowers to pay an up-front premium or origination
fee. That premium (for instance, $5 on a $100 loan) was recorded as
income to the government in the fiscal year the guarantee commitment
was made, while federal disbursements to cover the guarantee if the
borrower later defaulted were recorded as spending in future years, if
and when a default occurred. Thus, even if the chance of default was
high, the loan guarantee looked like a savings for the government,
rather than a cost, in the year the guarantee was issued.
CREDIT REFORM ACT RECORDS FULL COSTS OF LOANS WHEN THEY ARE MADE
To make the budgetary effects of loans and loan guarantees
comparable with each other--and with other federal spending programs--
the Credit Reform Act of 1990 established rules for recording the full
lifetime cost of loans and loan guarantees in the year that they are
made.
Essentially, the cost recorded for making a direct loan is the cash
disbursement of the loan, minus the present value of the estimated
repayments of interest and principal that will be received over the
life of the loan. This estimate takes into account the terms of the
loan (including the interest rate and repayment schedule), as well as
the risk that the borrower will default on the loan before it is paid
off. If the interest rate is low or the borrower is likely to default,
the cost to the government will be higher than if loan charges a higher
interest rate or goes to a more credit-worthy borrower.
To take account of the time-value of money, the interest and
principal payments received over the course of the loan are discounted
at the Treasury's cost of borrowing. The time-value of money reflects
the fact that $100 today is worth more than $100 ten years from now.
This can easily be illustrated by the fact that if you receive $100
this year, you could invest that $100 in ten-year U.S. Treasury notes.
If the interest rate is 3.2 percent and you re-invest your interest
earnings in Treasury notes, you will end up with $137 after ten years:
$100 now is worth more than $100 in ten years.
The Credit Reform Act takes a similar approach with loan
guarantees. The budget records the up-front cost of a loan guarantee as
the difference between (1) any up-front premium that the borrower pays
the government when the loan-guarantee commitment is made; and (2) the
present value of the government's estimated cost of covering future
defaults (reduced by any proceeds the government is estimated to
receive by selling any collateral it acquires when a default occurs).
The key here is that the cost recorded in the budget reflects up
front the estimated cash flows related to the loan or loan guarantee
over the course of the loan. For other programs, in contrast, cash
flows are shown when they occur. Thus, the Credit Reform Act did not
change the recorded cost of credit programs, which derives from the
actual cash the government pays and receives; it only changed the years
in which those costs were recorded.\3\
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\3\Before credit reform was enacted in 1990, all the various cash
flows of a credit program were shown in the year that they occurred,
and Treasury debt increased or decreased (as did interest payments) as
cash left the government or flowed back to the government. When the
loan finally matured, the sum total of all the cash transactions
including interest equaled the amount by which the debt held by the
public had increased as a result of the loan's issuance. Credit reform
aggregated these credit transactions into a single subsidy cost shown
up front. After a loan matures, the sum of that subsidy and the
interest that the Treasury has paid on the money it borrowed to finance
that subsidy is exactly the same as the amount that would have been
recorded in the budget before the Credit Reform Act; it represents the
amount by which the debt held by the public increased. Thus, credit
reform did not change the recorded lifetime budgetary cost of credit
programs; it simply shifted the timing of when that cost is recognized.
The net cost is now shown up front so Congress can better see it at the
time it votes to impose that cost.
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It should be emphasized that the estimated costs of loans and loan
guarantees, under either the old or the new accounting, take full
account of so-called default risk--the likelihood that some direct
loans will not be paid back in full or that a borrower will default on
a loan that the federal government has guaranteed.\4\
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\4\Estimates are based on calculations for a class of similar loans
or guarantees, not for individual loans or guarantees.
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PROPOSAL WOULD ADD A FURTHER AMOUNT TO REFLECT
PRIVATE-SECTOR LOSS AVERSION
Even as the Credit Reform Act was being debated, some argued that
its method of calculating the cost of credit programs understated the
``true'' cost of credit programs in a broader societal sense because it
reflects the cost to the federal government rather than what similar
loans or loan guarantees would cost in the private market. The
government's cost of making a loan is less than that of a private
lender because it can borrow more inexpensively.
Since 1990, this argument has been refined, particularly in work by
Deborah Lucas and Marvin Phaup.\5\ Lucas and Phaup argue there is an
additional ``cost'' of credit programs that is not reflected in
estimates of the cash flows in and out of the Treasury resulting from
loans or loan guarantees.
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\5\Deborah Lucas and Marvin Phaup, ``Reforming Credit Reform,''
Public Budgeting & Finance, Winter 2008, pp. 90-110.
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They point out that the loan costs would be higher if the private
sector made the loans, due to the variability of the cash flows
associated with loans and the fact that private individuals are loss
averse, as explained below. They argue that the federal budget should
show what the loans and loan guarantees would cost if made in the
private sector, rather than what it costs the government to make them.
The credit cash flows are variable because it is impossible to know
with certainty exactly how much will be repaid on a given loan (or
class of loans), since that figure reflects how many borrowers will
default and what collateral the government might acquire after a
default. As a result, the actual collections flowing from any direct
loan or class of direct loans and the actual guarantee payments
required to indemnify a lender in the case of defaults on federally
guaranteed loans may be higher or lower than originally estimated.
This variability does not mean that the original estimates of the
cash flows in and out of the Treasury due to a credit program were
faulty and didn't fully reflect the likelihood of default. It simply
reflects the inherent uncertainty of the cash flows. To understand
this, consider what happens when a coin is flipped 100 times. We know
the best estimate is 50 heads, 50 tails. But if this exercise were
repeated thousands of times, the result would rarely be exactly 50
heads out of any 100 flips. The average--or expected value--would be 50
heads, but most of the time there would be more or fewer than 50 heads.
Lucas and Phaup do not contend that the current estimates of the
cost of credit programs misrepresent the cash flows related to loans
and guarantees; they do not claim that CBO and OMB underestimate the
true expected value of the cash flows. Their argument is different:
that regardless of whether the estimates of the cash flows are the best
ones possible--indeed, even if they perfectly represent the expected
cash flows--the method of calculating the cost of credit programs under
the Credit Reform Act does not reflect the full ``cost'' for a
different reason.
Lucas and Phaup base their argument on the variability of the
actual cash flows and how individuals respond to risk in financial
arrangements. Research has found that private individuals are loss
averse; for example, they generally appreciate an unexpected gain of
$100 less than they dislike an unexpected loss of $100. As a result,
people are unwilling to accept a financial arrangement with variable
outcomes at a price that only represents the expected value (or best
estimate) of the outcome.
Most financial economists use the term ``risk aversion'' as a
synonym for ``loss aversion.'' They describe markets as being ``risk
averse'' and investors as demanding a ``risk premium'' before they are
willing to put their money on the line; they say the premium reflects
``market risk.'' This phrase does not mean that investors are averse to
losses (of course they are), but rather that they are more averse to
losses than they are attracted by equally likely gains of the same
magnitude.
Because individuals are loss averse, Lucas and Phaup argue, the
government should be loss averse as well, on their behalf. That means
the cost of credit programs should appear in the federal budget as
exceeding the best estimate of their actual cost to the Treasury (that
is, as exceeding the best estimate of the cash flows that will result
from the loans and guarantees). As they put it, ``[I]ncluding a risk
premium in subsidy cost produces a cost estimate that, on average,
exceeds outlays for realized losses.''\6\ Because the government should
be loss averse, they believe, it should be considered as losing more if
collections turn out lower than estimated than it will gain if
collections turn out higher than estimated. They argue that this loss
aversion should be converted into a dollar figure and added to the cost
of credit programs shown in the federal budget, as well as to the cost
of legislation related to credit programs.
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\6\Lucas and Phaup, page 92.
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Lucas and Phaup would have the government calculate this extra
``cost'' by estimating what private markets would charge to issue or
guarantee the same set of loans. They would estimate, for example, how
much the private sector would pay to acquire the government's portfolio
of direct student loans. Presumably, loss-averse private investors
would value the portfolio at a lesser amount than the government is
expected to collect in loan repayments (after fully accounting for
expected defaults and for the time-value of money).\7\ They would then
add this extra ``cost''--a loss-aversion penalty--to the actual cost to
the government of the loans and guarantees.
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\7\In the same vein, if the government tried to purchase
reinsurance from the private sector to cover the defaults associated
with a government portfolio of loan guarantees, a loss-averse private
investor would charge more to reinsure that portfolio than a perfect
estimate of what the government, after accounting for the time-value of
money, will actually have to pay on the defaults.
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To do this, H.R. 1872 defines two separate costs: (a) the
government's actual cash cost in operating credit programs, as
calculated under the existing Credit Reform Act rules; and (b) the
additional amount associated with loss aversion on the part of private
investors. The bill would require the federal budget to treat the sum
of these two amounts as the cost of a credit program, thereby raising
the apparent cost of the program and legislation related to it.
WHY THE PROPOSAL IS FLAWED
This legislation suffers from several serious flaws.\8\
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\8\The authors are indebted to an article by David Kamin, ``Risky
Returns: Accounting for Risk in the Federal Budget,'' May 2012, for its
presentation of the arguments against including nonbudgetary costs of
credit programs in the federal budget. Available at http://ssrn.com/
abstract=2039784.
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Loss Aversion Is Not a Budgetary Cost
Most fundamentally, the problem with adding a loss-aversion penalty
to the cost shown in the budget for loan and loan guarantee programs is
that loss aversion is not, in fact, a budgetary cost. The loss-aversion
penalty that Lucas and Phaup propose and H.R. 1872 would require would
reflect amounts that the government would never actually pay to anyone.
The obvious question then is: why should the budget record loss
aversion as a cost when the government never pays that cost?
Answering this question requires thinking about what the budget is
supposed to do. For over 200 years, the answer has been that the
federal budget is supposed to record the amount that the government
disburses on spending programs and the amount it receives in revenues,
and to show the difference as a surplus or deficit (and to the extent
that deficits have exceeded surpluses, to cover the difference by
borrowing and to record that borrowing as debt). To meet this purpose,
the budget must measure accurately the amounts actually spent on
programs and the amounts actually collected in taxes and fees, and the
resulting deficits and debt--what budget analysts call the nation's
fiscal position.
Adding a loss-aversion penalty to the spending side of the budget
would add an extra ``cost'' that the government does not actually
incur--and that doesn't need to be covered by additional taxes or
borrowing. It would consequently cause the budget to mis-measure
deficits and debt and no longer serve the basic purpose of accurately
presenting the nation's fiscal position. With respect to nation's
fiscal position, a risk-aversion penalty is a phantom cost.
Proposal Does Not Treat All Programs the Same
Another problem with the proposal is that it would result in
inconsistent and discriminatory budgetary treatment of different
categories of federal programs. To help Congress and the nation
allocate public resources among competing priorities, the budget should
record the costs of all government programs in the same way. It is
essential that $100 in costs for one program mean the same thing as
$100 in costs for another program, so that policymakers can know how
much cost a policy will impose on the Treasury as they decide how to
allocate resources.
H.R. 1872 violates this principle. It would make credit programs
appear more expensive to the government than they truly are without
making similar adjustment for other programs whose actual costs also
are uncertain and variable. Much of the budget involves programs whose
costs are only known for certain after the fact--that is, programs for
which the best, unbiased estimates of expected costs nevertheless
entail uncertainty, and for which actual costs will almost certainly
turn out to be either lower or higher than the original estimates.
Social Security and Medicare are two examples. Even some programs for
which fixed rather than variable dollars are appropriated, such as
weapons procurement, involve uncertainty because it is never known
whether the items will end up costing more or less than budgeted, and
Congress almost always feels it has to cover any shortfalls. Similarly,
the costs of existing or proposed tax expenditures are often as
uncertain as the costs of traditional spending programs.
If policymakers add a loss-aversion penalty to credit programs,
they should add one to all other variable and uncertain costs as well.
Not doing so would disadvantage credit programs relative to other forms
of government assistance or investment and would distort the budget as
a tool for allocating public resources.
Phantom Costs Require Phantom Offsets
Since the loss-aversion penalty that H.R. 1872 would mandate would
not reflect the amount the government actually spends, recording these
phantom costs would cause the budget to display a spending total that
exceeds what the Treasury pays out. The budget's deficit figures would
also be overstated, since they would exceed the true difference between
actual expenditures and actual revenues. Similarly, the amount of debt
held by the public would be inaccurate, since it would be higher than
the amount the Treasury actually has borrowed.
To avoid some of these bizarre results, advocates of adding a loss-
aversion penalty tacitly or explicitly advocate accompanying that
adjustment with a phantom offset. Proposing offsets to prevent the
deficit and debt figures from being out of whack essentially
acknowledges that the government will not actually incur the additional
``cost'' they would require to be shown for credit programs.
The obviously unsatisfactory nature of these phantom offsets, which
are described below, underscores the point that the budget should
measure actual costs and receipts and should not include either phantom
costs or phantom offsets. And it concedes our point that H.R. 1872 is
not about generating more accurate and unbiased estimates of likely
defaults.
Lucas and Phaup propose recording a phantom tax receipt
equal in size to the phantom loss-aversion penalty they propose for the
credit programs. In other words, the budget would show both more
spending than the Treasury actually spends and more tax revenues than
it actually collects, in order to keep annual deficits and total debt
from being inaccurate. (Note that under this approach, an increase in a
credit program would be shown as increasing revenues as well, and hence
would run afoul of ``no tax'' pledges and be unconstitutional under
versions of the Balanced Budget Amendment that bar increases in taxes.)
OMB's recent experience with a mandate to display phantom
costs demonstrates how hard it is to make sense of the results.
Specifically, a provision of the 2008 Troubled Asset Relief Program
(TARP) required that OMB record a loss-aversion penalty on top of
TARP's expected effects on government cash flows. But that legislation
failed to specify an offset. OMB handled this in two ways. First, to
avoid overstating the deficit, it created a phantom offset--lower
interest payments on the debt, spread over time. In other words, over
the lifetime of the portfolio of assets that Treasury might acquire
under TARP, OMB showed a figure for interest costs lower than the true
amount of interest that OMB expected Treasury to pay. This produced an
incoherent result: TARP's increase in up-front spending and deficits
was shown to reduce interest costs. But at least the budget totals for
government spending (counting interest), deficit, and debt would be
correct over time. Second, OMB proceeded to unwind this phantom
scorekeeping in each subsequent year by re-estimating downward each
year both the loss-aversion penalty and the offsetting interest-payment
adjustment.
H.R. 1872 adopts a different approach. It requires that
the phantom cost not be offset by phantom revenue increases or phantom
interest reductions, thus leaving the recorded amount of federal
spending--and the recorded deficit figures--at permanently inflated
levels.
Rather, it directs OMB to ignore the phantom increase in the
deficit when recording the debt; in effect, it creates a phantom offset
that would prevent the debt from being recorded too high even though
the annual deficits would consistently be overstated. One result of
this approach is that the sum of deficits over time would diverge more
than it already does from the amount of debt held by the public.
Government May Be Less Risk Averse than Individuals
The flaws discussed above explain why the basic concept of a
budgetary loss-aversion penalty is wrong. But even if one believes that
the government should add a loss-aversion penalty to its recorded
costs, the government need not be as loss averse as private
individuals.
Individuals are loss averse in part because they are likely to need
their financial assets at specific times, even when the value of those
assets has declined. They will need their savings when they retire,
when their children are in college, or when they suffer a severe
illness or disaster, and so cannot simply ``ride out'' a down financial
market by borrowing instead of cashing in their assets. Put simply,
individuals may be forced to ``sell low'' if they need cash when times
are bad.
The general fund of the Treasury, in contrast, is rarely or never
in that position because, as history shows, when times are bad it can
borrow very inexpensively. (Consider the current low interest rates the
Treasury pays, which are near or below zero in real terms.) The
government is thereby able to spread risk across decades or even
generations, while individuals generally cannot.
IS THERE A PLACE FOR A LOSS-AVERSION ESTIMATE?
Estimates of the extent (if any) to which government credit
activities impose a loss-aversion ``cost'' on taxpayers should not play
a part in budget accounting, because they do not represent an actual
government cost and their inclusion in the budget would mis-measure the
government's fiscal position and inappropriately bias policymakers
against credit programs relative to other forms of aid. Nevertheless,
the concept that governmental transactions can impose uncertainty or
``risk'' on the public is not without merit. To the extent that the
government does not spread such uncertainty risk across generations (or
ameliorate it by spreading it to well-off people, who are less loss
averse), the concept of loss aversion can and should play a part in the
cost-benefit analysis that policymakers should undertake in deciding
whether a government program constitutes wise public policy.
Cost-benefit analysis, however, is not budgeting. A cost-benefit
analysis serves a different purpose--to provide information on whether
a program or project is worthwhile. To illustrate the difference
between budgetary costs and cost-benefit analysis, consider two
bridges, each of which would cost $50 million to construct. A bridge
from nowhere to nowhere is a waste of money, while a bridge connecting
two bustling sister cites might have substantial economic and social
benefits. The budget should reflect $50 million in cost for each
bridge--no more and no less--but a cost-benefit analysis that helps
inform policymakers should take into account all of the pros and cons
of the two bridges. In this context, loss aversion on behalf of the
taxpayer, to the extent that it may exist, is a legitimate factor to
include in the cost side of a cost-benefit analysis.
Under H.R. 1872, however, other important aspects of cost-benefit
analysis would not be reflected as phantom budget costs--not the social
costs and benefits of regulation, for example, nor the large risk-
mitigation benefits of social insurance programs such as Social
Security and Medicare. Just as most government spending programs have
uncertain rather than fixed costs, they also have uncertain rather than
fixed benefits.
This discussion raises a final point about the basic concept of a
loss-aversion penalty in the budget. H.R. 1872 looks only at the
uncertainty cost that a credit program might impose on risk-averse
taxpayers, while failing to consider the benefits to risk-averse
borrowers such as students, farmers, or homebuyers. If the subsidy cost
under a loan program turns out to be higher than the original estimate,
taxpayers will eventually have to cover the higher costs--but borrowers
will have received more help. Put differently, the ability to borrow
from the government creates a benefit (of an uncertain amount) for the
borrower. To the extent that this benefit proves larger than expected,
it may impose a social cost on risk-averse taxpayers, but it also
confers a social benefit on risk-averse students, farmers, homebuyers,
or other borrowers. The proposed legislation would recognize only the
costs, not the benefits. Our view--that loss aversion can be one of a
number of appropriate factors of cost-benefit analysis, but not of
budget accounting--would still demand that all risk-aversion aspects of
government programs be taken into account in a fair cost-benefit
analysis.
Our conclusion is the same as Robert Reischauer's, who stated that
this proposal ``would add a cost element from a traditional cost-
benefit analysis without adding anything based on the corresponding
benefit side of such an analysis. It would also make budget accounting
less straightforward and transparent [and is] a misguided attempt to
mold budget accounting to facilitate a cost-benefit analysis, with the
result that neither the budget nor the cost-benefit analysis would
serve their intended purposes well.''\9\
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\9\Reischauer is a former President of the Urban Institute and a
former Director of the Congressional Budget Office. Letter to
Representative Chris Van Hollen, January 23, 2012; see http://
www.offthechartsblog.org/reischauer-strongly-opposes-house-bill-to-
inflate-cost-of-federal-credit-programs/.